<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period
from ----------------------------to--------------------------------
TUBOSCOPE VETCO
INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-18312 76-0252850
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation or organization) Identification No.)
2835 Holmes Road, Houston, Texas 77051
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 799-5100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.01 par value
(Title of Class)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 24, 1995 was $129,446,758 based on the closing sales
price of such stock on such date.
[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The number of shares outstanding of the registrant's common stock, as of
March 24, 1995 was 18,492,394.
-------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 1995 Annual Meeting are
incorporated by this reference into Part III as set forth herein.
<PAGE>
PART I
ITEM 1. BUSINESS
Tuboscope Vetco International Corporation (the "Company") was incorporated
under the laws of Delaware on March 28, 1988 for the purpose of acquiring
Tuboscope Vetco International Inc. fka Tuboscope Inc. ("TVI") from Minstar Inc.
("Minstar"). The acquisition of TVI (the "Merger") was consummated on May 13,
1988. The Company is a holding company which owns all of the outstanding
capital stock of TVI, CTI Inspection Services Inc. (CTI), and Tuboscope Vetco
Capital Corporation (TVCC). The Company has no independent operations. As used
in this Report, except as the context otherwise requires or as otherwise
defined, the "Company" and "Tuboscope" mean Tuboscope Vetco International
Corporation together with its subsidiaries.
HISTORY
The Company was one of the first companies to provide tubular inspection and
corrosion protection services to the oil and gas industry, commencing operations
in 1937. From 1937 through the mid-1940s, Tuboscope provided these services
primarily to domestic companies involved in the exploration and production of
oil and gas. TVI expanded its operations into international markets during the
mid-1940s.
During the early 1960s, the Company introduced inspection equipment for use by
steel mills to detect manufacturing defects in oilfield tubulars and to assist
in quality control. In the mid-1960s, the Company developed the Linalog(R) tool
used to inspect oil and gas pipelines without disrupting product flow and began
marketing its pipeline inspection services. In 1990, the Company strengthened
its ultrasonic inspection capabilities with the acquisition of Sound Optics
Systems, Inc. dba Sound Optical Systems, Inc. (SOS), one of the technological
leaders of ultrasonic inspection services for oil country tubular goods.
In October 1991, the Company significantly expanded its international
operations with the acquisition of Baker Hughes Tubular Services, Inc. (Vetco
Services). From the 1930s through the 1940s, Vetco Services provided oil
country tubular inspection and coating services primarily in the Western United
States. In the 1950s, Vetco Services began providing tubular inspection and
coating services in several international markets, acting primarily as a
licensee of the Company in Europe. By the 1960s, Vetco Services was no longer
acting as a licensee for the Company and had developed a significant presence in
the European markets. Vetco Services subsequently entered the Middle East and
Far East markets in the 1970s. In the mid-1970s, Vetco Services added its
industrial inspection services for heavy industrial projects. In 1977, Vetco
Services was acquired by Combustion Engineering, Inc. and operated as a division
of that company until it was acquired by Baker Hughes Incorporated ("BHI") in
March 1989. BHI merged Vetco Services' then existing operations with BHI's
existing international inspection and coating services operation, Baker PA, to
form Vetco Services.
In 1993 the Company added to its North American oilfield services with the
acquisition of the inspection assets of D. J. Inspection Services Inc. (DJ) and
furthered its industrial inspection capacity with the acquisition of CTI. In
October 1994, the Company purchased the manufacturing and inspection assets of
NDT Systems, Inc., Bandarena Enterprises Limited, NDT Eagle Ltd. and Tubular
Ultrasound Ltd. (NDT).
The principal executive offices of the Company are located at 2835 Holmes
Road, Houston, Texas, 77051, telephone (713) 799-5100.
GENERAL
The Company is primarily engaged in the inspection and coating of oil country
tubular goods (drill pipe, line pipe, casing and tubing) and the in-place
inspection of oil and gas pipelines. Demand for the Company's inspection
services is based, in part, on the relatively low cost of such services compared
to the potential cost to a customer of the failure of a tubular or pipeline
segment. As a result of the Vetco Services acquisition, the Company is the
largest provider of these inspection and coating services in the world.
Approximately 52% of the Company's
2
<PAGE>
revenue for the year ended December 31, 1994 was derived from international
(outside the United States and Canada) sales.
See Note 12 of Notes to Consolidated Financial Statements of the Company for
financial information relating to foreign and domestic operations and export
sales.
Oilfield Services
Oilfield Services, which constitutes the largest portion of the Company's
business, involves primarily the inspection and coating of new and used oil
country tubular goods. The Company's Oilfield Services operations provide
inspection and/or coating services in over 54 countries in North America, Latin
America, Europe, Africa, the Middle East and the Far East. Demand for these
services depends in large part upon the level of oil drilling and production
activity.
New Tubular Inspection. Newly manufactured pipe sometimes contains serious
defects that are not detected by the mill. In addition, pipe can be damaged in
transit and during handling prior to use at the well site. As a result,
exploration and production companies often have new tubulars inspected before
they are placed in service to reduce the risk of pipe failures during drilling
and completion of oil and gas wells.
The Company's tubular inspection equipment employs all major non-destructive
inspection techniques, including electromagnetics, ultrasonics, flux leakage and
gamma ray. The primary methods used by the Company to inspect new tubulars are
electromagnetics and ultrasonics. These inspection services are provided both
by mobile units and at fixed site inspection locations.
Used Tubular Inspection. Used tubulars are inspected by the Company to detect
service-induced flaws after the tubulars are removed from operation. Used drill
pipe and used tubing inspection programs allow operators to replace lengths that
are detected as being defective, thereby prolonging the life of the remaining
pipe and saving the customer the cost of unnecessary tubular replacements and
pipe failure related expenses.
As with new tubular inspection, the used tubular inspection services are
provided both by mobile units and at fixed site inspection locations. The used
tubular inspection centers offer a complete line of reclamation services
necessary to return tubulars to useful service. In addition to electromagnetic
inspection, these facilities offer tubular cleaning and straightening,
hydrostatic testing and re-threading.
Related Inspection Services. In addition to its new and used tubular
inspection services, the Company also offers a wide range of related inspection
services, including API thread inspection and ring and plug gauging, as well as
various used drill pipe services. The Company also provides an ultrasonic
inspection service for detecting potential fatigue cracks in the end area of
used drill pipe, the portion of the pipe that has traditionally been the most
difficult to inspect. The Company also provides a tubing wellhead inspection
system for inspecting tubing in gas lift wells, pumping wells and salt water
injection and disposal wells.
Tubular Coatings. The Company develops, manufactures and applies its tubular
coatings, known as Tube-Kote(R) coatings, to new and used tubulars. Coatings
help prevent corrosion of tubulars by using plastics with protective properties.
In addition, coatings are designed to improve oil flow by controlling paraffin
and scale buildup, which can reduce or block oil flow in producing wells. The
use of coatings extends the life of existing tubulars, reduces the frequency of
well workovers, reduces interruptions in service and increases the hydraulic
efficiency of the wells.
Revenue from the Company's Oilfield Services (including equipment sales)
provided approximately 73%, 71% and 74% of the Company's revenue during the
years ended December 31, 1994, 1993 and 1992, respectively.
3
<PAGE>
Pipeline Services
Pipeline Services provides in-place inspection services for oil and gas
pipelines to identify defects in the pipelines without removing or dismantling
the pipelines and without disrupting the product flow. This service gives
customers a convenient and cost effective method of identifying defects in
pipelines and enables them to remedy such defects. The Company inspects
pipelines by launching a Linalog(R) tool into the pipeline. Propelled by the
product flow, the Linalog(R) tool uses electromagnetics to record the severity
and location of internal and external pitting-type corrosion as well as defects
in the pipeline, which provides a basis for evaluation and repair by the
customer. Once the test is complete, the Linalog(R) tool is returned to the
Company, refurbished and used for future pipeline inspections.
Revenue from the Company's Pipeline Services (including equipment sales)
represented approximately 11%, 11% and 12% of the Company's revenue for the
years ended December 31, 1994, 1993 and 1992, respectively.
Management believes that there are growth opportunities for the Company's
Pipeline Services due to the aging of the worldwide pipeline network and new
pipeline construction. Pending domestic governmental pipeline inspection
requirements and an extensive pipeline infrastructure in Eastern Europe are
additional industry factors that are expected to contribute to the growth of the
Company's Pipeline Services. Additionally, management believes that the
Linalog(R) Plus technology and the 1994 commercial introduction of the Company's
TruRes/TM/ inspection technology will provide additional markets and growth
opportunities. The Linalog(R) Plus service is a computer enhanced method for
presenting the inspection report produced by the Company's traditional
Linalog(R) technology. The TruRes/TM/ technology is the Company's entry into
the "High Resolution" market of pipeline inspection that utilizes advanced
computer technology and other advancements within the body of the inspection, or
Tru Res/TM/ tool.
Industrial Inspection Services
As a result of the Vetco Services acquisition in October 1991, and the CTI
Inspection Services Inc. (CTI) acquisition in April 1993, the Company provides
industrial inspection and monitoring services for the construction, operation
and maintenance of major projects in energy-related industries. Inspection
techniques include the X-raying of pipeline girth welds, electromagnetic
inspection of storage-tank floors and ultrasonic or eddy current inspection of
refinery equipment. Monitoring services include various quality assurance and
control and supervision services. Most of these services are provided during
fabrication, installation and maintenance of energy-related facilities. The
primary customers are power plants undergoing construction or maintenance,
chemical and petrochemical plants, pipeline construction companies and pipeline
owners. Revenue from Industrial Inspection Services accounted for approximately
9%, 12%, and 10% of the Company's revenue for the years ended December 31, 1994,
1993 and 1992, respectively.
Mill Systems and Sales
Mill Systems and Sales fabricates and sells or leases inspection equipment to
steel mills. The equipment is operated by the steel mills and is used for
quality control purposes to detect transverse, longitudinal and three-
dimensional defects in the pipe during a high-speed manufacturing process. Each
piece of mill inspection equipment is designed to customer specifications and is
installed and serviced by the Company. Since 1962, the Company has installed
more than 80 units worldwide.
Revenue from the Company's Mill Systems and Sales represented approximately
4%, 5%, and 4% of the Company's revenue for the years ended December 31, 1994,
1993 and 1992, respectively. Revenue for Mill Systems and Sales may fluctuate
significantly from year to year due to the timing of negotiating large domestic
and export sales contracts, arranging financing, and manufacturing equipment.
The Company historically has refrained from selling pipeline and oilfield
services inspection equipment to customers in areas where it provides inspection
services. Since January 1, 1986, the Company has sold approximately $35.8
million of pipeline and oilfield services inspection equipment and approximately
$12 million of mill inspection equipment in markets where it generally does not
provide inspection services, principally the former Soviet Union and China.
4
<PAGE>
Management believes that opportunities exist for additional equipment sales to
former Eastern Bloc countries and to customers in other markets where the
Company historically has not provided inspection services. However, there can
be no assurance that any such sales will be made by the Company. Additionally,
the recent NDT acquisition should enhance the Company's range of product lines.
NDT SYSTEMS ACQUISITION
In October 1994, the Company purchased the manufacturing and inspection assets
of NDT. NDT manufactures equipment used in the inspection of oil country
tubular goods for sale to mills and to inspection companies worldwide. This
acquisition allows the Company to expand its mill inspection product line and
enhances its manufacturing capabilities. In the United Kingdom this acquisition
adds ultrasonic inspection capabilities to the Company's UK services.
SEASONAL NATURE OF THE COMPANY'S BUSINESS
Historically, the level of the Company's business in domestic Oilfield
Services and domestic Pipeline Services has followed seasonal trends, which are
described below. However, these historical trends, in Oilfield Services, can be
subject to significant changes resulting from fluctuations in oil prices and
changes in domestic rig count. The Company's International Oilfield Services
(excluding Canada), Mill Systems and Sales, and Industrial Inspection Services
have no particular seasonal trend. The timing of mill equipment sales is not
easily predictable and, accordingly, revenue tends to fluctuate from quarter to
quarter.
The Company's Oilfield Services business in the United States tends to realize
lower activity levels during the first quarter of the calendar year due to the
typical delay in the approval of drilling budgets and weather restrictions. The
Company's Oilfield Services business in Canada typically realizes a strong first
quarter of the calendar year as operators take advantage of the winter freeze to
help gain access to drilling and production areas, and then declines during the
second quarter of the calendar year due to weather conditions which result in
road bans which curtail drilling activity. Oilfield services activity in both
the United States and Canada typically increases during the third quarter of the
calendar year and then peaks in the fourth quarter of the calendar year as
operators authorize the spending of remaining drilling and/or production capital
budgets for the year.
Pipeline Services typically experiences reduced activity during the first
quarter of the calendar year. The high winter demand for gas and petroleum
products in the northern states and the consequent curtailment of
maintenance/inspection programs result in less opportunity to perform pipeline
inspection during this time. During the second quarter of the calendar year,
activity begins to increase and normally continues at relatively stable levels
through the end of the year as operators finish scheduled maintenance programs.
CUSTOMERS AND DISTRIBUTION NETWORK
The Company markets its products and services primarily to oil and gas
companies and manufacturers of oil country tubular goods, principally through
its 64 employee sales organization. In addition, the Company sells its Oilfield
services to numerous tubular supply stores, which incorporate these products and
services as part of their packaged sales to end-users. The Company's
international oilfield inspection services were historically marketed in large
part through licensees. These licenses generally ranged in duration from three
to five years and were for the most part renewable, unless termination notices
were given by either party. In 1990, the Company commenced operating directly
in selected foreign markets rather than marketing its services through
licensees. With the acquisition of Vetco Services, which markets its services
directly or through joint ventures, the Company has a stronger direct presence
in the international marketplace.
Of approximately 829 domestic accounts served by Oilfield Services, the 20
largest accounts comprised approximately 54% of total domestic sales
attributable to Oilfield Services for the year ended December 31, 1994. During
the year ended December 31, 1994, the top 15 customers for Pipeline Services
represented approximately 63% of total revenue attributable to Pipeline
Services and the largest 10 accounts for Mill Systems and Sales
5
<PAGE>
represented approximately 62% of total revenue attributable to Mill Systems and
Sales. No single customer accounted for as much as 10% of the Company's total
revenue in 1994.
See Note 12 of Notes to Company's Consolidated Financial Statements contained
herein for financial information relating to foreign and domestic operations and
export sales.
PATENTS, LICENSES AND TRADEMARKS
Management believes that the Company's strong market position in its major
businesses is enhanced by its technology. Through an internal development
program and certain acquisitions, the Company has assembled an extensive array
of inspection systems and coatings in addition to a substantial number of
trademarks, patents and other proprietary rights.
The Company's electromagnetic inspection system, known as Amalog(R) IV,
performs four separate inspections in one semi-automated process: the
Sonoscope(R) section detects transverse defects, which are flaws aligned across
the pipe; the Amalog(R) section detects flaws with longitudinal dimensions; the
Isolog(R) section detects variations in the thickness of the wall of the pipe;
and the grade verifier section compares each length with a standard to determine
whether all the pipe is of the same metallurgical grade. The Company also
offers special end area inspection to locate transverse and longitudinal
defects. The Company's electromagnetic inspection capabilities were enhanced by
the acquisition of certain technology rights as part of the Vetco Services
acquisition. Most notable was the PipeImage/TM/ System for electromagnetic
inspection. This system uses small sensors, digital signal processing, computer
interpretation and three-dimensional image presentation to help identify flaws
in mid-range walled pipe which may be undetectable with conventional
electromagnetic inspection services.
The Company's ultrasonic inspection capabilities were significantly enhanced
with the July 1990 acquisition of SOS, one of the technological leaders of
ultrasonic inspection services for oil country tubular goods. The equipment
used in the Company's ultrasonic inspection systems (U-Tron(R), SOS Ultrasonic
Inspection Unit and Vetcoscan(R)) are designed to inspect heavywall or non-
magnetic tubing, casing and line pipe for manufacturing defects, where the
effectiveness of electromagnetic inspection is limited.
As part of the Vetco Services acquisition, the Company acquired BHI's
interests in substantially all of the foreign and domestic trademarks and
patents and other proprietary technology used in the Vetco Services business
(other than Vetcoscan(R)). These technologies include Vetcolog(R),
PipeImage/TM/ and Vetcoscope(R) electromagnetic inspection systems and the end
area inspection system and all of the liquid and powder coating technology. In
addition, the Company obtained certain rights to use the Vetcoscan(R) ultrasonic
inspection technology outside the United States. In connection with such
acquisition, BHI's domestic coating and inspection business retained the right
to use such technology in the United States. ICO, Inc. acquired the domestic
inspection and coating business of BHI in September 1992.
As part of the Company's tubular coating services, the Company develops,
manufactures and applies its tubular coatings, known as Tube-Kote(R) coatings,
to new and used tubulars. Tube-Kote(R) coatings are manufactured by and for the
Company using a variety of resins, including phenolic, epoxy or urethane, each
selected for its suitability under certain corrosive conditions and then
formulated to enhance performance. Some coatings are applied in combination,
such as a phenolic base with an epoxy top coat, and then cured into a single
coating to develop the properties of both plastics. Every coating is tested and
evaluated in field conditions before being released for customer use. Tube-
Kote(R) coatings are developed and manufactured either at the Company's Houston,
Texas facility or are manufactured in North America or Europe through agreements
with local manufacturers.
The Company also offers a complete line of connection services for internally
coated line pipe. These include Thru-Kote/TM/ and Thru-Kote/TM/ U.B. systems
for welding coated line pipe, and a variety of other specialized fittings.
6
<PAGE>
The Company has proprietary rights to a number of foreign and domestic
trademarks important to its business. It also owns various foreign and domestic
patents related to the design and manufacture of certain products. Many of the
patents have expired or will soon expire, and many of the trademark
registrations are up for renewal within the next two years. Management intends
to renew these trademarks. Although management believes that no single patent
is material to the business of the Company, it continues to seek new patents to
protect the Company's proprietary interests in certain products as necessary.
COMPETITION
The Company's major competitor in the domestic inspection and coating markets
is ICO, Inc. In addition, in the domestic and international inspection markets,
a large number of small regional inspection companies provide competition.
Certain foreign jurisdictions and government-owned petroleum companies located
in some of the countries in which the Company operates have adopted policies or
regulations which may give local nationals in these countries certain
competitive advantages.
The principal competitive factors in Oilfield Services are price,
availability, quality of service and product performance and technology. The
price and availability tend to be the controlling factors of inspection
services, while quality of service, product performance, price and availability
principally impact customers' decisions to purchase coating services.
The Company's major competitors in Pipeline Services are Vetco Pipeline
Services, Inc., a U.S. subsidiary of Rauma Repola; British Gas plc; Ipel Kopp
(Pipetronix), a subsidiary of A.G. Preussay Anlagensau; and H. Rosen Engineering
GmbH. Management believes the major competitive factors for Pipeline Services
are product performance and technology, quality of service and price. The
market for the Company's Industrial Inspection Services is highly fragmented and
comprised of many competitors with price the major competitive factor. The
Company's main competitor in Mill Systems and Sales is Institut Dr. Forster GmbH
& Company KG. Product performance, quality of service and price are the
competitive factors in this area.
ENGINEERING AND MANUFACTURING
The Company manufactures or assembles the equipment and products which it
leases and sells to customers and which it uses in providing inspection and
coating services. In addition to producing new equipment and products, the
Company produces spare parts for its equipment and for resale, and renovates and
repairs equipment at its manufacturing facilities in Houston and Midland, Texas.
The equipment and products designed and manufactured by the Company range from
electromagnetic and ultrasonic inspection systems to coating products. Design
and engineering are based on research and development efforts as well as
established customer and industry standards.
RAW MATERIALS
The Company believes that materials and components used in its servicing and
manufacturing operations and purchased for sales are readily available at
competitive prices from numerous sources.
BACKLOG
The Company does not believe that backlog is material to its business.
7
<PAGE>
ENVIRONMENTAL MATTERS
The Company's inspection and coating services routinely involve the handling
and disposal of chemical substances and waste materials, some of which may be
considered to be hazardous wastes. These potential hazardous wastes result
primarily from the use of mineral spirits to clean pipe threads during the
tubular inspection process and from the coating process.
The Company's operations are subject to numerous local, state and federal laws
and regulations, including the regulations promulgated by the Occupational
Safety and Health Administration, the United States Environmental Protection
Agency, the Nuclear Regulatory Commission and the United States Department of
Transportation. Management believes that the Company is in substantial
compliance with these laws and regulations, and that the compliance and remedial
action costs associated with these laws and regulations have not had a material
adverse effect on its results of operations, financial condition or competitive
position, to date.
The Company cannot predict the effect on it of new laws and regulations with
respect to radioactive hazardous wastes caused by naturally occurring
radioactive materials or with respect to other environmental matters.
Circumstances or developments which are not currently known as well as the
future cost of compliance with environmental laws and regulations could be
substantial and could have a material adverse effect on the results of
operations and financial condition of the Company.
Pursuant to an agreement executed as part of the Merger in 1988, Minstar has
agreed, subject to certain limitations concerning the time for submitting claims
and the amount of losses to be covered as described below, to indemnify the
Company with respect to all losses, liabilities, damages and expenses incurred
in connection with, arising out of or resulting from the production, use,
generation, emission, storage, treatment, transportation, disposal or other
handling or disposition or migration of any kind of any toxic or hazardous
wastes at any time prior to the closing of the Merger. Claims for
indemnification were required to be made before May 13, 1992. Minstar is
obligated to indemnify the Company for the first $1 million of losses incurred
by the Company and fifty percent of losses in excess of $2 million. The Company
is solely responsible for the second $1 million of losses incurred and fifty
percent of losses in excess of $2 million. The Company has claims for
indemnification from Minstar aggregating $1 million. Therefore, the Company
would then be responsible for the next $1 million of losses. Amounts for any
losses in excess of $2 million aggregate amount are to be shared equally by
Minstar and the Company until the indemnity obligation terminates. The Company
has claims against Minstar for their half in an amount in excess of $200,000.
See "Business--Legal Proceedings" for a description of the indemnity to be
provided by Minstar with respect to actions, suits, litigation, proceedings or
governmental investigations which may also apply to certain environmental
matters.
The Company was one of 140 defendants in a civil lawsuit, Dolan, et al. v.
Humacid et al., that alleged property damage and personal injuries arising from
a former waste dump site. This suit has been settled, and the Company paid
approximately $100,000.
8
<PAGE>
EMPLOYEES
As of December 31, 1994, the Company employed 1,954 full-time employees
worldwide, of whom 1,000 were employed domestically. The Company considers its
relations with its employees to be excellent.
ITEM 2. PROPERTIES
The following is a description of the Company's major facilities:
<TABLE>
<CAPTION>
SIZE
Location DESCRIPTION (SQUARE FEET) OWNED/LEASED
----------------------------- -------------------------------------------------- -------------------------- -----------------
<S> <C> <C> <C>
DOMESTIC:
Amelia, Louisiana Coating Plant 85,000 on 8 Acres Building Owned*
Bakersfield, California Reclamation Facility 7,200 on 6 Acres Owned
Casper, Wyoming Inspection Facility 91,720 on 29 Acres Owned
Oklahoma City, Oklahoma Inspection Facility 6,000 on 5 Acres Owned
Edmond, Oklahoma Coating Plant 40,000 on 19 Acres Owned
Harvey, Louisiana Coating Plant and Inspection Facility 53,000 on 7 Acres Owned
Houston, Texas Holmes Road Complex: Manufacturing, Warehouse 300,000 on 50 Acres Owned
and Corporate Offices, Coating Manufacturing
Plant, Pipeline Services, Manufacturing and
Log Operations
Engineering/Technical Research Center 76,000 on 6 Acres Owned
Coating Plant 83,000 on 43 Acres Owned
Sheldon Road Complex: Region Administration 137,000 on 94 Acres Owned
Offices and Pipe Inspection and Storage Facilities
SOS Inspection Facility 32,000 on 31 Acres Owned
Midland, Texas Coating Plant, Reclamation Facility and Technical 87,000 on 25 Acres Owned
Service Building
Midland, Texas Manufacturing Facility 65,120 on 10 acres Leased
Odessa, Texas Pipe Storage Yard and Ancillery Service Facility 12,000 on 23.20 Acres See below**
Morgan City, Louisiana Inspection Facility and Division Office 42,400 on 3 Acres Building Owned*
North Slope (Deadhorse), Inspection, Repair and Service Center 18,400 Building Owned*
Alaska
Kenai, Alaska Inspection Facility 9,100 on 21 Acres Leased
INTERNATIONAL:
Edmonton (Nisku), Canada Coating Plant and Inspection Facility; Pipeline 114,000 on 40 Acres Owned
Services, Maintenance and Log Operations
Berlaimont, France Coating Plant 44,000 on 16 Acres Owned
Singapore Coating Plant 50,644 on 8 Acres Building Owned*
Singapore Inspection Facility 19,429 on 3 Acres Building Owned*
Bordon, England Pipeline Services, Maintenance and Log Operations 12,000 Building Owned*
Aberdeen, Scotland Inspection Facility & Coating Plant 64,982 on 10 Acres Owned
Celle, Germany Inspection Facility and Vetco Services' 43,560 on 12 Acres Building Owned*
Headquarters
Gladbeck, Germany Coating Plant 25,635 on 4 Acres Owned
Veenoord,Netherlands Reclamation and Repair Facility 53,361 on 2 Acres Leased
A1 Khobar, Saudi Arabia Reclamation, Inspection Facility and Office Space 28,341 on 8 Acres Leased
* Building owned subject to a ground lease.
** DJ Inspection Services, Inc. vs ICO Tubular Inspection Services Inc.
Facility is subject of a lawsuit, DJ Inspection Services, Inc. vs ICO Tubular Inspection Services Inc. Case No. CC2-8750 in the
county court at Law #2, Odessa county Texas. D J is seeking to enforce its option to purchase. Tuboscope occupies facility
pursuant to agreement with DJ Inspection Services, Inc., NKA Centrax International Inc.
</TABLE>
The Company owns undeveloped acreage next to several of its facilities,
including over 100 acres of undeveloped property located in Houston, Texas.
Machinery, equipment, buildings, and other facilities owned and leased are
considered by management to be adequately maintained and adequate for the
Company's operations. Substantially all of the owned U. S. major facilities
(including real property) are subject to liens in favor of banks to secure
senior indebtedness, except for the SOS Inspection Facility which is subject to
liens in favor of the former owners of such property. In addition, the
Aberdeen, Scotland facility is subject to a lien associated with the financing
of that facility. See Part II, Item 7, "Management's Discussion and Analysis of
Results of Operations and Financial Condition of the Company" and Note 6 of
Notes to the Company's Consolidated Financial Statements incorporated by
reference herein.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in numerous legal proceedings which arise in the
ordinary course of its business. A description of certain of these proceedings
follows. The Company is unable to predict the outcome of these proceedings;
however, for the reasons set forth below, management believes that none of these
legal proceedings
9
<PAGE>
will have a material adverse effect on the results of operations or financial
condition of the Company. Notwithstanding the foregoing, there can be no
absolute assurance that the indemnity from Minstar discussed below,
indemnification available from BHI with respect to Vetco Services or the
Company's insurance coverage will be sufficient to protect the Company from
incurring substantial liability as a result of these proceedings.
The Company has been party to two lawsuits that allege wrongful death or
injury of former employees resulting from exposure to silica and silica dust
during employment with the Company, both of which have been settled. These
settlements have been made on the Company's behalf by the Company's and
Minstar's insurance carriers without financial loss to the Company. The Company
is aware of the possibility that suits may be brought against it by other former
employees alleging exposure to silica and silica dust during their employment
with the Company. These suits may involve claims for wrongful death under a
theory of gross negligence and claims for punitive damages, the amounts of which
could be substantial but cannot be predicted. Additionally, the Company has
been sued for two other claims arising out of allegations of exposure to
asbestos, benzine and certain other substances alleged to have been used
primarily during its processes in the 1960's and 1970's. The Company believes
that, based upon insurance and indemnification from Minstar, any such potential
claims, if asserted, would not have a material adverse effect on the Company's
results of operations or financial condition.
Pursuant to an agreement executed in connection with the Merger, Minstar
agreed, subject to certain limitations, to hold the Company harmless from and
against any and all losses, liabilities, damages, deficiencies and expenses (in
excess of $1.5 million in the aggregate) arising out of product and/or general
liability claims arising out of occurrences on or prior to the closing of the
Merger. In addition, Minstar agreed, subject to certain limitations, to hold
the Company harmless from any and all losses, liabilities and damages,
deficiencies and expenses related to any action, suit, litigation, proceeding or
governmental investigation existing or pending on or prior to the closing of the
Merger. There is, however, a dispute with Minstar concerning whether the
indemnification referenced in the first sentence of this paragraph is applicable
only if the claim is the type that would be covered by a product or general
liability insurance policy. The Company firmly maintains that all suits or
claims are the responsibility of Minstar when the event giving rise to liability
occurred prior to the closing of the Merger. No assurance can be given,
however, that Minstar will not contest responsibility for future suits,
including those filed under theories of gross negligence. Management believes
that Minstar is responsible for indemnifying it with respect to all of the
aforementioned lawsuits subject in certain instances to the $1.5 million basket.
In addition, while management believes certain liability arising from certain of
the above described suits will be covered by insurance, such suits may be
subject to a reservation of rights and the coverage could be contested by the
carriers providing such insurance.
Pursuant to an agreement executed in connection with the Vetco Services
acquisition, BHI agreed, subject to certain limitations, to indemnify the
Company from certain losses rising out of breach of certain warranties and
covenants. The Company has made a claim in this matter in excess of $9 million.
Management believes it is entitled to indemnity from BHI, however, BHI is
contesting responsibility for the Company's claim.
The Company was a defendant in a suit alleging wrongful death or injury
entitled Sam Fowler Jr., et al. v Union Carbide Corp., et. al. This suit has
been settled and the Company's costs were covered by insurance.
The Company is a defendant along with two of its employees in a suit alleging
fraud; breach of contract; breach of implied covenant of good faith and fair
dealing; misappropriation of trade secrets; and international interference with
contractual relationship, which has been filed by a competitor, Artic Pipe
Inspection, Inc. ("API") arising out of the review of documents relating to
discussions concerning a possible acquisition of API by the Company. The case
was originally filed as Artic Pipe Inspection, Inc. vs Tuboscope Vetco
International Inc. et al Case Number 3-KN-95-115-CI in the Superior Court for
the State of Alaska, Third Judicial District at Kenai on February 8, 1995, and
has been removed by the Company to the United States District Court for the
State of Alaska. The removal is based upon the Company's allegation of
"fraudulent joinder" of its employees merely to hold Alaska state court
jurisdiction. API has alleged in excess of $20 million as damages. The Company
strongly views this as a frivolous lawsuit and intends to defend it vigorously
as all allegations arise out of proper conduct of the Company both in its
negotiations with API and the securing of a customer contract through an
independent bidding process.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed on The Nasdaq Stock Market under the
symbol "TUBO". The following table sets forth, for the calendar periods
indicated, the range of high and low closing prices for the common stock, as
reported by The Nasdaq Stock Market System:
<TABLE>
<CAPTION>
1994 1993
----------------- -----------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter... $7 1/2 $4 5/8 $8 7/8 $6 7/8
2nd Quarter... 7 1/8 4 1/2 9 3/8 8
3rd Quarter... 8 6 1/8 9 7 5/8
4th Quarter... 7 3/8 5 5/8 6 5/8 5 3/4
</TABLE>
The closing price of the Company's common stock on March 24, 1995 was $7.00.
The approximate number of stockholders of record on March 24, 1995 was 289.
The Company has not declared or paid any dividends on its common stock since
its inception and does not currently plan to declare or pay any dividends.
Since the Company is a holding company which conducts substantially all of its
operations through TVI and its subsidiaries, the ability of the Company to pay
dividends on the common stock is dependent on TVI's ability to pay dividends to
the Company. The Company is effectively prohibited from paying dividends on its
common stock due to restrictions on the ability of TVI to pay dividends or
advance funds to the Company under the terms of its senior indebtedness and the
indenture governing the 10.75% Senior Subordinated Notes of TVI. The terms of
the Company's Series A Convertible Preferred Stock also restrict the ability of
the Company to pay dividends on its common stock.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information below is presented in order to highlight significant trends in
the Company's results from operations and financial condition.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
--------------- ---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA (3):
Revenue................................... $192,175 $183,340 $164,996 $151,769 $128,337
Cost of sales............................. 140,462 137,188 123,149 109,366 91,378
-------- -------- -------- -------- --------
Gross profit.............................. 51,713 46,152 41,847 42,403 36,959
Selling, general and administrative
expense.................................. 21,511 26,773 21,491 16,619 15,443
Research and engineering costs............ 3,154 3,678 3,209 3,845 2,921
Restructuring costs....................... -- 13,256 1,406 3,270 --
-------- -------- -------- -------- --------
Operating profit.......................... 27,048 2,445 15,741 18,669 18,595
Interest expense.......................... 12,190 10,595 11,676 11,255 11,400
Other (income) expense, net............... 569 2,657 (484) 84 791
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item..................... 14,289 (10,807) 4,549 7,330 6,404
Provision (benefit) for income taxes...... 6,001 (2,445) 1,027 2,784 2,455
-------- -------- -------- -------- --------
Income (loss) before extraordinary item... 8,288 (8,362) 3,522 4,546 3,949
Extraordinary item, net of income tax..... (764) (4,497) -- -- (541)
-------- -------- -------- -------- --------
Net income (loss)......................... 7,524 (12,859) 3,522 4,546 3,408
Dividends applicable to redeemable
preferred stock.......................... 700 700 700 124 452
-------- -------- -------- -------- --------
Net income (loss) applicable to common
stock.................................... $ 6,824 $(13,559) $ 2,822 $ 4,422 $ 2,956
======== ======== ======== ======== ========
Income (loss) before extraordinary item
and after deduction of preferred stock
dividends................................ $ .41 $ (.49) $ .15 $ .35 $ .34
Extraordinary item........................ (.04) (.25) -- -- (.05)
-------- -------- -------- -------- --------
Net income (loss) per common share........ $ .37 $ (.74) $ .15 $ .35 $ .29
======== ======== ======== ======== ========
BALANCE SHEET DATA (END OF PERIOD):
Working capital........................... $ 35,926 $ 5,279 $ 28,202 $ 49,795 $ 27,193
Total assets.............................. 317,027 310,108 299,734 326,969 191,090
Long-term debt (1)........................ 123,851 101,489 101,373 118,207 81,964
Preferred stock........................... 10,175 10,175 10,175 10,124 --
Common stockholders' equity............... 113,424 105,256 119,849 115,223 69,897
OTHER DATA:
EBITDA(2)................................. $ 40,859 $ 14,006 $ 29,446 $ 27,820 $ 24,934
Ratio of EBITDA to interest expense(2).... 3.35x 1.32x 2.52x 2.47x 2.19x
Depreciation and amortization............. $ 14,380 $ 14,218 $ 13,221 $ 9,235 $ 7,130
Capital expenditures...................... $ 7,549 $ 14,640 $ 5,296 $ 7,546 $ 3,461
-----------------
(1) Includes long-term capital lease obligations and excludes current maturities.
(2) "EBITDA" means earnings before interest, taxes, depreciation, amortization and extraordinary item and should not be considered
as an alternative to net income or any other generally accepted accounting principles measure of performance as an indicator of the
Company's operating performance.
(3) Certain amounts in 1990 - 1992 have been reclassified to conform to the current year presentation.
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OVERVIEW
<TABLE>
Key Industry Indicators*:
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Rig Activity:
U.S. 775 754 721
Canada 261 184 96
International 734 773 857
------ ------ ------
Worldwide 1,770 1,711 1,674
------ ------ ------
West Texas Intermediate Crude (per barrel) $17.26 $18.37 $20.55
------ ------ ------
Natural Gas Prices $ mbtu $ 1.72 $ 1.97 $ 1.61
------ ------ ------
</TABLE>
*Averages for the years indicated
The Company's business depends, in large part, on the worldwide rig count as
73% of the Company's 1994 total revenue was oilfield related. Demand for and
price of oil and gas worldwide effect the drilling and production activity of
the Company's oilfield customers. Although U.S. rig activity has increased from
the June 1992 post World War II low of 596, average rig activity for 1994 and
1993 of 775 and 754, respectively, was only 7.5% and 4.5% above the 1992 average
rig count of 721; comparatively 1994 rig count was 9.9% below the average for
1991 of 860 rigs. International rig activity declined 5% in 1994 compared to
1993, and was 14.4% less than 1992 levels and 19.3% below the 1991 average of
909 rigs. In addition, the 1994 West Texas Intermediate Crude prices continued
to decline as the average price per barrel was $17.26 compared to $18.37 in 1993
and $20.55 in 1992. Natural gas prices were also down slipping from an average
of $1.97 mbtu in 1993 to $1.72 in 1994.
As a result of industry conditions, the Company recorded a $13.3 million
restructure charge and implemented a major restructuring plan in the third
quarter of 1993. The 1993 restructuring plan, which was primarily focused on
reducing International and North America overhead and consolidating operations,
followed several strategic actions in 1991 and 1992 which closed or consolidated
15 North America operating locations in response to the declining North America
oilfield activity. Primarily as a result of these actions as well as an overall
increase in revenue, the Company's 1994 gross profit and operating profit were
up $5.6 million and $11.3 million, respectively, over 1993 (pre-restructure)
results.
The 1995 average U.S. rig count through March 10, 1995 was 720 rigs, a
decrease of 6% compared to the same period in 1994, while the average Canadian
rig count was up 11% to 348 rigs during the same period. The 1995 international
rig count was down 1% through February 1995 compared to February 1994. The
lower rig activity in the U.S. and international markets should result in
slightly lower oilfield inspection and coating service revenue in the first
quarter of 1995 compared to 1994.
The Company refinanced its senior and subordinated debt in 1994 and 1993,
respectively. On June 30, 1994 the Company and its subsidiaries entered into a
new senior credit agreement for $23,000,000 in term loans, a $35,000,000
revolving credit facility, and a $1,000,000 letter of credit facility. The term
loan facility requires increasing quarterly principal payments with an initial
payment of $500,000 on September 30, 1994 and the final payment of $1,250,000
due June 30, 2001. The revolving credit agreement expires June 30, 1997. In
April 1993, TVI issued $75 million of 10.75% Senior Subordinated Notes due April
15, 2003. Proceeds from the new senior and subordinated debt were principally
used to retire the existing senior and subordinated debt.
13
<PAGE>
Set forth below is the Company's revenue for 1994, 1993 and 1992 divided into
the Company's major service areas:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Oilfield Services:
Inspection
North America........................ $ 43,471 $ 41,268 $ 29,558
International........................ 48,099 44,918 50,604
-------- -------- --------
Total Inspection......... 91,570 86,186 80,162
-------- -------- --------
Coating
North America........................ 32,540 31,213 29,200
International........................ 17,115 12,916 12,252
-------- -------- --------
Total Coating............ 49,655 44,129 41,452
-------- -------- --------
Total Oilfield Services... 141,225 130,315 121,614
Pipeline Services......................... 21,468 20,301 20,358
Industrial Inspection Services............ 16,978 20,440 15,939
Mill Systems & Sales...................... 8,290 9,799 7,085
Other Revenue............................. 4,214 2,485 --
-------- -------- --------
Total Revenue........... $192,175 $183,340 $164,996
======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
Year ended December 31, 1994 vs year ended December 31, 1993
Revenue. Revenue was $192.2 million for the fiscal year ended December 31,
1994, an increase of $8.8 million, or 5%, compared to $183.3 million for the
fiscal year ended December 31, 1993.
Revenue from the Company's Oilfield Services was $141.2 million for 1994, an
increase of $10.9 million, or 8%, over 1993. The increase was mainly due to a
$7.4 million increase in International Oilfield Services revenue as
International Inspection Services revenue increased $3.2 million (or 7%) and
International Coating Service revenue was up $4.2 million (or 33%). The
increase in International Inspection revenue was up due to $8.3 million in
equipment sales related to a reclamation facility in Algeria. Excluding the
Algerian equipment sales, International Inspection revenue would have decreased
$5.1 million as the International rig count dropped 5% and Inspection revenue
declined in Italy, Netherlands, and Saudi Arabia. International Coating revenue
increased as a result of a full years activity from the Company's Aberdeen,
Scotland coating facility and improved market conditions for drill pipe and line
pipe coating revenue in the Far East. North America Inspection revenue was up
$2.2 million (or 5%) due to an approximate $1.5 million increase in U.S.
inspection revenue and a $.7 million increase in Canada inspection revenue. The
increase in U.S. revenue was due in part to a 3% increase in the average U.S.
rig count in 1994 compared to 1993. The increase in Canada inspection revenue
was not reflective of the 42% increase in the Canadian rig count as the increase
in rig count was mainly due to shallow wells which do not require the Company's
services. North America Coating revenue increased $1.3 million (or 4%) in 1994
mainly as a result of greater revenue from the Company's Amelia, Louisiana
Coating facility related to increased offshore activity.
Pipeline Services revenue was $21.5 million for 1994, an increase of $1.2
million (or 6%) over the $20.3 million earned in 1993. The increase was due to
increased U.S. activity, initial service revenue in the former Soviet Union, and
the introduction of the Company's hi-resolution tool (TruRes/TM/) in the second
half of 1994.
Industrial Inspection revenue was $17.0 million for 1994, a decrease of $3.5
million (or 17%) compared to $20.4 million in 1993. The decline was primarily a
result of lower activity in the Middle East due to a general
14
<PAGE>
decline in Middle East gulf markets and delayed projects in Saudi Arabia. The
decline in industrial inspection revenue is expected to level off in 1995 with
1995 revenue expected to be similar to 1994.
Mill Systems and Sales revenue was $8.3 million, $1.5 million (or 15%) less
than 1993 revenue of $9.8 million. The decrease was due primarily to a $2.9
million reduction in mill equipment sales in 1994 compared to 1993, offset by
revenue of $1.4 million from the Company's NDT Systems business which was
purchased on October 7, 1994.
Other revenue was $4.2 million for 1994, and included revenue from the
Company's tank inspection business, CTI Inspection Services Inc. (CTI), and
revenue from the Company's Environmental Services. The main reason for the $1.7
million increase in other revenue was primarily due to Environmental Services
revenue in Alaska during 1994 with no corresponding revenue in 1993.
Gross Margin and Gross Profit. Gross profit was $51.7 million for 1994, an
increase of $5.6 million (or 12%) over 1993. The improvement in gross profit
was due to greater revenue and a more favorable product line mix in 1994 than
1993; greater revenue in high margin product lines such as Pipeline Services and
Coating and less revenue in lower margin product lines such as Industrial
Inspection. Gross profit also improved due to lower fixed costs in 1994
compared to 1993 as a result of the 1993 restructure. Gross margin (defined as
revenue minus variable expense) as a percent of revenue was 46.2% in 1994
compared to 45.9% in 1993. The improvement in gross margin was due to stronger
margins in Pipeline Services as a result of the Company's new Hi-Resolution tool
and higher margins in International Coating especially in the Far East due to
strong market conditions in 1994. The increase in these margins was partially
offset by lower mill equipment sales in 1994.
Selling, General and Administrative Expense. Selling, general and
administrative costs of $21.5 million for 1994 was $5.3 million less than 1993
results. The 1993 results included bad debt reserves of $.9 million and
litigation costs of $1.4 million. Excluding these items, selling, general and
administrative expense decreased $2.9 million primarily due to cost reductions
achieved through the restructuring plan implemented during the third quarter of
1993. In addition, fewer active employees in the German pension plan in 1994
resulted in lower pension liabilities and a reduction in selling, general, and
administrative expense.
Research and Engineering Costs. Research and engineering costs were $3.2
million for 1994 compared to $3.7 million in 1993. The decrease was mainly due
to work performed during the second quarter of 1994 by the Mill engineering
group on manufacturing projects associated with the sale or lease of Rotary UT
units (Truscope/TM/) as compared to research and engineering expense projects in
1993.
Restructuring Costs. The Company incurred $13.3 million of restructuring
costs in the third quarter of 1993 in response to a decline in international
drilling activity and heavy discounting in the domestic markets. Restructuring
costs were mainly related to the Company's international operations as
international overhead personnel was reduced significantly, and total
international headcount was reduced by approximately 13%. The Company also
accrued for costs associated with consolidating certain international and
domestic facilities. North America headcount (fixed costs personnel) was also
reduced as part of the restructure. There were no comparative restructuring
charges in 1994.
Operating Profit. Operating profit was $27.0 million for 1994 compared to
$2.4 million in 1993. Excluding 1993 restructure charges of $13.3 million and
accruals for legal claims, bad debt reserves, and social taxes of $2.1 million,
1993 operating profit would have been $17.8 million. Operating profit
improvement was mainly related to the increase in revenue discussed above, and
the 1993 restructuring and resulting decrease in 1994 fixed costs (both
operations and selling, general, and administrative).
Interest Expense. 1994 interest expense of $12.2 million was $1.6 million
greater than 1993 interest expense of $10.6 million. The increase was mainly
related to the 1993 retirement of an interest swap agreement which resulted in a
gain and lower interest expense of approximately $1.2 million during 1993.
15
<PAGE>
Other Expense (Income). Foreign exchange losses in 1994 were $269,000
compared to $793,000 in 1993. The majority of the 1993 loss was due to the high
inflation rates in Brazil which resulted in a foreign exchange loss of
approximately $383,000. The 1993 foreign exchange loss in Brazil was partially
offset by interest earned of $244,000, which is reflected in 1993 interest
income. The majority of the other 1993 foreign exchange loss was associated with
foreign exchange losses in the UK related to a decline in the pound sterling. In
1994, exchange losses were down in both Brazil and the UK. In addition, 1994
results included a net gain of $1.3 million from the settlement of a South
America insurance claim.
Provision (Benefit) for Income Taxes. The Company recorded a tax provision
for continuing operations of $6.0 million for the year ended December 31, 1994.
The recorded provision as a percentage of income before income taxes and
extraordinary items is 42%. The effective tax rate is more than the statutory
rate primarily due to distributions of foreign earnings and nondeductible
goodwill amortization.
The Company has, as of December 31, 1994, gross deferred tax assets of $17.5
million, including approximately $4.7 million of foreign tax credit carryovers,
$1.9 million of investment tax credit carryovers, and $3.1 million of domestic
and foreign net operating loss carryovers. The Company has recorded a valuation
allowance of $1.3 million against these deferred tax assets. Realization of a
substantial portion of the Company's deferred tax assets will require the
completion of certain tax planning strategies. In the event the Company were to
determine in the future that any such tax planning strategies would not be
implemented, an adjustment to the deferred tax liability of up to $7 million
would be charged to income in the period such determination was made.
Extraordinary Item, Net of Income Tax Effect. On June 30, 1994, refinancing
of TVI's senior secured term loan and revolving credit facility was completed.
The refinancing and related early retirement of existing senior debt resulted in
an extraordinary after-tax charge of $764,000 associated with the write-off of
unamortized debt fees in the second quarter of 1994.
On April 16, 1993, TVI completed its registration and sale of $75 million of
10.75% Senior Subordinated Notes (Notes) due 2003. Substantially all of the net
proceeds from the sale of the Notes were used to redeem all of the $65.7 million
of 14% Senior Subordinated Debentures due 1998, which were called at 107% of the
principal balance on May 3, 1993. An extraordinary after-tax charge of $4.5
million was recognized in the second quarter of 1993 due to the write-off of
fees and the call premium associated with the retirement of the $65.7 million
14% debentures.
Net Income (Loss). Net income was $7.5 million for 1994 compared to a loss of
$12.9 million in 1993 due to the factors discussed above.
Year Ended December 31, 1993 vs Year Ended December 31, 1992
Revenue. Revenue was $183.3 million for the fiscal year ended December 31,
1993, an increase of $18.3 million, or 11%, compared to $165.0 million for
fiscal year ended December 31, 1992.
Revenue from the Company's Oilfield Services was $130.3 million for 1993, an
increase of $8.7 million over 1992. The increase was mainly attributable to an
increase of $13.7 million, or 23%, in North America Oilfield Services revenue.
The increase in North America Oilfield Services was in part attributable to the
15% increase in the average North America rig count, with U.S. rig count up 4.5%
and the Canadian rig count up approximately 92% from 1992. Coupled with the
greater North America activity was the acquisition of the assets of DJ, which
provided revenue from a new customer base. The increase in North American
Oilfield Services revenue was offset by a $5.0 million, or 8% decline, in
International revenue. The decline was mainly related to the 10% drop in rig
activity for this area. The decline was most noticeable in European activity
where revenue declined $6.0 million, or 21%, from 1992. Germany, Italy and the
Netherlands were the areas most effected by the decline in European activity.
Pipeline Services revenue in 1993 was relatively constant compared to 1992.
North American revenue increased slightly, by $385,000, while international
revenue declined $442,000. The decline in international revenue
16
<PAGE>
was due to lack of inspection work from Algeria, Oman and Mexico which accounted
for $5.0 million revenue in 1992. This was offset by an increase in work being
performed in Saudi Arabia for Aramco.
Industrial inspection revenue grew approximately $7.0 million, or 44%, as
compared to year ended December 31, 1992. The increase in industrial inspection
is mainly associated with higher activity levels in the Middle East area,
principally in Saudi Arabia, coupled with $2.3 million in revenue earned as a
result of the CTI acquisition.
Mill Systems and Sales revenue increased in 1993 over 1992 by $2.7 million as
a result of additional equipment sales during 1993 as compared to 1992,
including a sale to a Romanian pipe mill of a large mill inspection unit.
Gross Margin and Gross Profit. Gross profit was $46.2 million for 1993, $4.3
million greater than 1992. The increase in gross profit is mainly attributable
to the approximately $18.3 million increase in revenue. Gross margin (defined
as revenue minus variable expenses) for 1993 of 45.9% was approximately 1.4%
less than the level for 1992. The decrease in gross margin was due to a decline
in North American margin attributable to higher labor costs associated with
overtime and contract labor required to complete customer orders on a timely
basis. Also, gross margins were effected by an increase in discounts mainly
relating to North American Inspection, as competitive pressure has required
pricing concessions. Gross margin was down 10.7% in Mill Systems and Sales due
to change in mix during 1993 between service revenue and equipment/parts sales.
Service revenue results in a higher margin, but in 1993 service revenue
accounted for only 31% of the total revenue, compared to 48% in 1992.
Equipment/parts sale gross margin declined 6.5% from prior year as sales prices
vary depending on type of equipment and market competition.
Gross profit as a percentage of revenue was 25.2% for 1993 or .2% lower than
the 1992 percentage level. Unfavorable product mix (the 1993 revenue increase
was concentrated in the Company's lowest gross profit product lines - North
America Inspection and Industrial Inspection) and lower North America gross
margins offset the positive impact of higher revenue.
Selling, General and Administrative Expense. Selling, general and
administrative costs of approximately $26.8 million for 1993 represents an
increase of $5.3 million from the same period for 1992. The increase was for
the most part attributable to an increase in selling costs from the DJ assets
acquisition (approximately $297,000); an increase in costs related to the CTI
acquisition for both selling ($599,000) and administration ($471,000); increase
in legal costs associated with patents ($248,000), workers compensation claims
($1,400,000); increase in bad debt reserves related to accounts in the Far East
and Nigeria ($934,000); increase in International administrative costs
related to employee tax in Italy ($200,000), insurance expense ($300,000), and
salaries and benefits ($523,000).
Research and Engineering. Research and engineering costs increased $469,000
in 1993 compared to 1992, mainly as a result of costs associated with new
pipeline products including the high resolution digital tools, dual diameter
tools, and Linalog(R) Plus software.
Restructuring Cost. As previously discussed the Company took a charge against
earnings during the third quarter of 1993 in the amount of $13.3 million. The
charge was established to recognize the cost of restructuring mainly the
overhead functions, and to provide for the closing of certain facilities and the
consolidation of others. The costs associated with the 1993 restructure have
been funded from operations or from borrowings under the Company's revolving
credit facility.
Operating Profit. Operating profits for 1993 were approximately $2.4 million,
as compared to approximately $15.7 million for 1992, after restructure charges.
Before restructure charges of $13.3 million, and accruals for legal claims, bad
debt reserves and social taxes of $2.1 million for 1993 compared to $1.4 million
for restructuring charges for 1992, operating profits were $17.8 and $17.1
million for 1993 and 1992, respectively. The increase in operating profits,
before the restructure charge and accruals was directly related to the increase
in revenue previously discussed.
17
<PAGE>
Interest Expense. 1993 interest expense of $10.6 million was $1.1 million
less than the 1992 interest expense of $11.7 million. The decrease in interest
expense was partially related to the refinancing of the Company's subordinated
debt cost from 14% to 10.75%. This change resulted in interest savings of
approximately $517,000 for 1993 from the 1992 cost. During 1993 the Company
retired interest swap agreements resulting in a gain of approximately $1.2
million, reducing interest expense for 1993. Partially offsetting these
declines in interest expense during 1993 was greater borrowings on the Company's
various working capital lines.
Other Expense (Income). During 1993, the Company incurred foreign exchange
losses of $793,000, approximately $669,000 less than during 1992. The majority
of the loss was due to the high inflation rates in Brazil which resulted in a
foreign exchange loss of approximately $383,000. The loss in Brazil was
partially offset by interest earned of $244,000, which is reflected in interest
income. Much of the remainder of the exchange loss was associated with foreign
exchange losses in the UK related to a decline in the pound sterling.
Provision (Benefit) for Income Taxes. The Company recorded a tax benefit for
continuing operations of $2.4 million for the year ended December 31, 1993. The
recorded benefit as a percentage of income before income taxes and extraordinary
items is 23%. The effective tax rate is less than the statutory rate primarily
due to valuation allowances against certain deferred tax assets, nondeductible
goodwill amortization and the increase in the U.S. statutory rate to 35%.
The Company has as of December 31, 1993, gross deferred tax assets of $20.2
million, including approximately: $4.9 million of foreign tax credit
carryovers; $1.9 million of investment tax credit carryovers, $.5 million of
alternative minimum tax credit carryovers and $4.5 million of domestic and
foreign net operating loss carryovers. The Company has recorded a valuation
allowance of $.9 million against these deferred tax assets.
During the third quarter of 1993, the Revenue Reconciliation Act of 1993
became law. Under the Act, the maximum federal income tax rate was
retroactively increased from 34% to 35%. An adjustment for this change has been
made to deferred tax liabilities. The other provisions of the Act did not have
a material effect on the tax provision.
Effective January 1, 1993, the Company adopted SFAS No. 109, Accounting for
Income Taxes. The implementation of SFAS No. 109 did not have a material effect
on the consolidated financial statements of the Company for the year.
Extraordinary Item (net of tax). An extraordinary after-tax charge of $4.5
million was recognized in the second quarter of 1993 due to the write-off of
fees and the call premium associated with the retirement of the $65.7 million
14% debentures.
Net Income (Loss). The Company reported a net loss of approximately $12.9
million during 1993, down from net income of $3.5 million for 1992, or a $16.4
million change. The loss for 1993 was associated with the $13.3 million pre-tax
restructure and $6.9 million pre-tax extraordinary loss previously discussed.
During 1992, as previously discussed, a restructure charge of $1.4 million pre-
tax was taken.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 1994, working capital was approximately $35.9 million, an
increase of $30.6 million from December 31, 1993. The increase in working
capital was mainly due to a $18.4 million decrease in the current portion of
long-term debt. The decrease in current portion of long-term debt was due to
the refinancing of the Company's senior credit agreement on June 30, 1994; see
Note 6 of the Notes to the Company's Consolidated Financial Statements. In
addition, working capital increased as a result of a $6.0 million increase in
cash, a $1.9 million increase in inventory, and a $4.2 million decrease in
accounts payable. The components of the increase in cash are detailed in the
Consolidated Statement of Cash Flow. The increase in inventory was due to the
acquisition of certain assets of NDT Systems, Inc. (NDT) on October 7, 1994.
The decrease in accounts payable was mainly due to a reduction in overdrafts.
18
<PAGE>
Other liabilities decreased $2.4 million primarily as a result of the
reclassification of the restructure accrual from long-term to current.
Current and long-term debt was $130.4 million at December 31, 1994, an increase
of $3.9 million since December 31, 1993. The increase was primarily related to
the acquisition of certain assets of NDT and 1994 cash severance payments
associated with the third quarter 1993 restructure accrual. The Company's
outstanding debt at December 31, 1994 consisted of $75 million of 10.75% Senior
Subordinated Notes due 2003, $22 million of term loans due under the Company's
Senior Credit Agreement, $20.0 million due under the Company's $35 million
revolving credit facility, $6.4 million of notes payable related to the
construction of the Aberdeen, Scotland coating facility, $2.5 million of notes
payable related to the acquisition of Sound Optical Systems, Inc., $2.0 million
of industrial revenue bonds, and $2.5 million of other outstanding debt.
The Company had $12.1 million available for borrowing at December 31, 1994 under
a $35 million revolving credit facility. Approximately $2.9 million of this
revolving line of credit facility was used for outstanding letters of credit.
The Company also had $186,000 of outstanding letters of credit against the $1
million letter of credit note under this facility.
Approximately 52% of the Company's revenue in 1994 was generated by subsidiaries
located outside the U.S. As a result, a significant portion of the Company's
working capital and net property, plant and equipment are located outside the
U.S., denominated in local currencies and are, in general, not hedged. These
assets and liabilities are exposed to translation gains or losses as the U.S.
dollar appreciates or depreciates relative to the appropriate local currencies.
During 1994, the depreciation of the U.S. dollar against European and Far East
currencies resulted in a $1.0 million improvement in the cumulative translation
adjustment account in stockholders' equity.
The Company made capital expenditures of $7.5 million in 1994. Capital
expenditures consist primarily of routine renovations and additions to property
and equipment, with 1994 capital spending concentrated mainly on the Company's
new inspection facility in Kenai, Alaska, the Company's new Hi-Resolution
Pipeline tools (TruRes/TM/), and the Company's new Rotary UT units
(Truscope/TM/). The Company's planned 1995 capital spending is expected to
approximate $8 million. The Company expects to fund its capital expenditure
requirements in 1995 principally from cash generated from operations and its
revolving credit line.
The Company's bank credit agreement and the Indenture restrict the ability of
the Company's subsidiaries to dividend or otherwise make distributions to the
Company.
In October 1994, the Company engaged Goldman, Sachs and Company to advise it
with respect to strategic alternatives to enhance shareholder value, including
the possible sale of all or part of the Company. The Company has reviewed
several alternatives with Goldman, Sachs, and the Goldman, Sachs engagement is
ongoing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is filed as a separate part of this Report (see page
22).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated herein by reference the information appearing
under the caption "Proposal 1--Election of Directors" and under the caption
"Executive Officers of the Company" of the registrant's definitive Proxy
Statement for its 1995 Annual Meeting to be filed with the Securities and
Exchange Commission on or before April 30, 1995.
19
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated herein by reference the information appearing
under the captions "Executive Compensation" and "Other Benefit Programs" of the
registrant's definitive Proxy Statement for its 1995 Annual Meeting to be filed
with the Securities and Exchange Commission on or before April 30, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated herein by reference the information appearing
under the caption "Voting Securities and Certain Holders Thereof" of the
registrant's definitive Proxy Statement for its 1995 Annual Meeting to be filed
with the Securities and Exchange Commission on or before April 30, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated herein by reference the information appearing
under the Caption "Certain Transactions" of the registrant's definitive Proxy
Statement for its 1995 Annual Meeting to be filed with the Securities and
Exchange Commission on or before April 30, 1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The list of financial statements contained in the accompanying
Index to Consolidated Financial Statements covered by Independent
Auditors' Report are filed as part of this Report (see page 22).
2. Financial Statement Schedules
The list of financial statement schedules contained in the
accompanying Index to Consolidated Financial Statements covered by
Independent Auditors' Report are filed as part of this Report (see
page 22).
3. Exhibits
The list of exhibits contained in the Index to Exhibits are filed as
part of this Report.
(b) Reports on Form 8-K
No reports on Form 8K were filed during the fourth quarter of 1994.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
By Martin R. Reid
-----------------------------------------
Martin R. Reid
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------- ------------------------------- --------------
<S> <C> <C>
MARTIN R. REID Chairman of the Board March 29, 1995
-----------------------------
Martin R. Reid
WILLIAM V. LARKIN, JR. Director March 29, 1995
-----------------------------
William V. Larkin, Jr. President and Chief Executive
Officer
(Principal Executive Officer)
RONALD L. KOONS Executive Vice President, Chief March 29, 1995
-----------------------------
Ronald L. Koons Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
MARTIN I. GREENBERG Vice President, Controller, March 29, 1995
-----------------------------
Martin I. Greenberg Assistant Treasurer and
Assistant Secretary
JEROME R. BAIER Director March 29, 1995
-----------------------------
Jerome R. Baier
MARTIN G. HUBBARD Director March 29, 1995
-----------------------------
Martin G. Hubbard
ERIC L. MATTSON Director March 29, 1995
-----------------------------
Eric L. Mattson
TIMOTHY M. PENNINGTON, III Director March 29, 1995
-----------------------------
Timothy M. Pennington, III
JAMES J. SHELTON Director March 29, 1995
-----------------------------
James J. Shelton
FREDERICK J. WARREN Director March 29, 1995
-----------------------------
Frederick J. Warren
</TABLE>
21
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
<TABLE>
<S> <C>
Tuboscope Vetco International Corporation:
Report of Independent Auditors............................................................... 23
Consolidated Balance Sheets as of December 31, 1994 and 1993................................. 24
Consolidated Statements of Operations for the years ended December 31, 1994, 1993, 1992...... 25
Consolidated Statements of Common Stockholders' Equity and Redeemable Preferred
Stock for the years ended December 31, 1994, 1993, 1992................................... 26
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993, 1992...... 27
Notes to Consolidated Financial Statements................................................... 28
The following financial statement schedules of the registrant and its subsidiaries required to be
included in Item 14(a)(2) are listed below:
Schedule I Parent Company Only Condensed Balance Sheets.......................................... 45
Schedule I Parent Company Only Condensed Statements of Operations................................ 46
Schedule I Parent Company Only Condensed Statements of Cash Flows................................ 47
Schedule I Parent Company Only Notes to Condensed Financial Statements........................... 48
Schedule II Valuation and Qualifying Accounts.................................................... 49
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted or the information is presented in the consolidated financial
statements or related notes.
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tuboscope Vetco International Corporation
We have audited the accompanying consolidated balance sheets of Tuboscope
Vetco International Corporation as of December 31, 1994 and 1993 and the related
consolidated statements of operations, common stockholders' equity and
redeemable preferred stock, and cash flows for each of the three years in the
period ended December 31, 1994. Our audits also included the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tuboscope Vetco International Corporation at December 31, 1994 and 1993, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Houston, Texas
February 17, 1995
23
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
A S S E T S
-----------
Current assets:
Cash and cash equivalents.......................................................... $ 8,531 $ 2,492
Accounts receivable, net........................................................... 51,068 51,037
Inventory, net..................................................................... 12,431 10,573
Deferred federal income taxes...................................................... 2,701 2,138
Prepaid expenses and other......................................................... 6,263 6,075
-------- --------
Total current assets............................................................ 80,994 72,315
-------- --------
Property and equipment:
Land, buildings and leasehold improvements......................................... 89,889 82,938
Operating equipment................................................................ 99,508 95,292
Equipment leased to customers...................................................... 3,079 2,346
Accumulated depreciation and amortization.......................................... (42,581) (32,193)
-------- --------
Net property and equipment...................................................... 149,895 148,383
Identified intangibles, net.......................................................... 32,139 35,150
Goodwill, net........................................................................ 49,032 49,655
Other assets, net.................................................................... 4,967 4,605
-------- --------
Total assets.................................................................... $317,027 $310,108
======== ========
L I A B I L I T I E S A N D E Q U I T Y
-----------------------------------------
Current liabilities:
Accounts payable................................................................... $ 15,010 $ 19,219
Accrued liabilities................................................................ 19,766 19,924
Federal and foreign income taxes payable........................................... 3,787 2,966
Current portion of long-term debt and short-term borrowings........................ 6,505 24,927
-------- --------
Total current liabilities....................................................... 45,068 67,036
Long-term debt....................................................................... 123,851 101,489
Pension liabilities.................................................................. 9,306 9,980
Deferred taxes payable............................................................... 13,534 12,070
Other liabilities.................................................................... 1,669 4,102
Commitments and contingencies (Notes 6 and 10).......................................
-------- --------
Total liabilities............................................................... 193,428 194,677
-------- --------
Redeemable Series A Convertible Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 100,000 shares issued and outstanding................................. 10,175 10,175
-------- --------
Common stockholders' equity:
Common stock, $.01 par value, 35,000,000 shares authorized, 18,466,763 shares
issued and outstanding (18,410,053 at December 31, 1993)......................... 184 184
Paid-in capital................................................................... 115,982 115,668
Retained earnings (deficit)....................................................... (1,469) (8,293)
Cumulative translation adjustment................................................. (1,273) (2,303)
-------- --------
Total common stockholders' equity............................................... 113,424 105,256
-------- --------
Total liabilities and equity.................................................... $317,027 $310,108
======== ========
</TABLE>
See accompanying notes.
24
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1994 1993 1992
------------- ------------- ------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenue:
Sale of services................................................ $ 175,371 $ 173,477 $ 156,349
Sale of products................................................ 13,573 6,709 4,715
Rental income................................................... 3,231 3,154 3,932
----------- ----------- -----------
192,175 183,340 164,996
----------- ----------- -----------
Costs and expenses:
Cost of services sold........................................... 131,326 132,752 119,929
Cost of products sold........................................... 7,935 3,260 2,056
Amortization of goodwill........................................ 1,201 1,176 1,164
Selling, general and administrative............................. 21,511 26,773 21,491
Research and engineering costs.................................. 3,154 3,678 3,209
Restructuring costs............................................. - 13,256 1,406
----------- ----------- -----------
165,127 180,895 149,255
----------- ----------- -----------
Operating profit.................................................. 27,048 2,445 15,741
Other expense (income):
Interest expense................................................ 12,190 10,595 11,676
Interest income................................................. (343) (457) (649)
Foreign exchange losses......................................... 269 793 1,462
Gain on sale of TKC............................................. - - (3,983)
Amortization of debt financing cost............................. 711 838 951
Minority interest............................................... 680 884 748
Insurance settlement............................................ (1,327) - -
Other, net...................................................... 579 599 987
----------- ----------- -----------
Income (loss) before income taxes and extraordinary item.......... 14,289 (10,807) 4,549
Provision for (benefit from) income taxes......................... 6,001 (2,445) 1,027
----------- ----------- -----------
Income (loss) before extraordinary item........................... 8,288 (8,362) 3,522
Extraordinary item, net of income tax benefits of $411,000 and
$2,421,000 in 1994 and 1993, respectively....................... (764) (4,497) --
----------- ----------- -----------
Net income (loss)................................................. 7,524 (12,859) 3,522
Dividends applicable to preferred stock........................... 700 700 700
----------- ----------- -----------
Net income (loss) applicable to common stock...................... $ 6,824 $ (13,559) $ 2,822
=========== =========== ===========
Earnings (loss) per common share:
Income (loss) before extraordinary item and after deduction
of preferred stock dividends................................... $ .41 $ (.49) $ .15
Extraordinary item.............................................. (.04) (.25) --
----------- ----------- -----------
Net income (loss)............................................... $ .37 $ (.74) $ .15
=========== =========== ===========
Weighted average number of common shares outstanding.............. 18,447,059 18,355,454 18,210,279
=========== =========== ===========
</TABLE>
See accompanying notes.
25
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK
<TABLE>
<CAPTION>
COMMON RETAINED CUMULATIVE REDEEMABLE
STOCK PAID-IN EARNINGS TRANSLATION PREFERRED
$.01 PAR CAPITAL (DEFICIT) ADJUSTMENT STOCK
-------- --------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance, December 31, 1991...................................... $177 $110,785 $ 2,444 $ 1,817 $10,124
Common stock issued, 498,000 shares at
$6.875 per share (net of public offering costs
of $279,621).............................................. 5 3,139 -- -- --
Common stock issued, 3,637 shares at $.32 per
share..................................................... -- 1 -- -- --
Dividends paid during 1992 ($5.25 per share, for Series A
Convertible Preferred Stock) net of December 31, 1991
accrual................................................... -- -- (525) -- (124)
Dividends accrued at December 31, 1992
($1.75 per share for Series A Convertible
Preferred Stock).......................................... -- -- (175) -- 175
Translation adjustment........................................ -- -- -- (1,341) --
Net income.................................................... -- -- 3,522 -- --
-------- -------- -------- ----------- -------
Balance, December 31, 1992...................................... 182 113,925 5,266 476 10,175
Common stock issued, 199,000
shares at $8.625 per share................................ 2 1,714 -- -- --
Common stock issued, 5,902 shares at various
option prices from $.32 to $6.875, on date issued,
per share................................................. -- 29 -- -- --
Dividends paid during 1993 ($5.25 per share for
Series A Convertible Preferred Stock), net of December 31,
1992 accrual.............................................. -- -- (525) -- (175)
Dividends accrued at December 31, 1993 ($1.75 per share for
Series A Convertible Preferred Stock).................... -- -- (175) -- 175
Translation adjustment........................................ -- -- -- (2,779) --
Net loss...................................................... -- -- (12,859) -- --
-------- -------- -------- ----------- -------
Balance, December 31, 1993...................................... 184 115,668 (8,293) (2,303) 10,175
Common stock issued, 40,216 shares
at an average price of $6.21 per share................... -- 251 -- -- --
Common stock issued, 14,135 shares
at $4.356 per share...................................... -- 63 -- -- --
Dividends paid during 1994 ($5.25 per share
for Series A Convertible Preferred Stock), net of
December 31, 1993 accrual................................ -- -- (525) -- (175)
Dividends accrued at December 31, 1994 ($1.75 per share
for Series A Convertible Preferred Stock)................ -- -- (175) -- 175
Translation adjustment........................................ -- -- -- 1,030 --
Net income.................................................... -- -- 7,524 -- --
-------- -------- -------- ----------- -------
Balance, December 31, 1994...................................... $184 $115,982 $ (1,469) $(1,273) $10,175
======== ======== ======== =========== =======
</TABLE>
See accompanying notes.
26
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss).................................................... $ 7,524 $(12,859) $ 3,522
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization..................................... 14,380 14,218 13,221
Compensation related to stock plan................................ 251 -- --
Provision (recovery) for losses on accounts receivable............ -- 1,084 (204)
Provision for losses on inventory................................. 91 9 1,100
Write-off of property and equipment............................... -- 2,754 --
Write-off of unamortized debt fees................................ 1,175 2,319 --
Benefit for deferred income taxes................................. 901 (8,638) (5,784)
Accrued differential on reverse interest rate swap agreements..... -- (680) (669)
Pension amortization benefit...................................... (315) (315) (266)
Gain on sale of TKC............................................... -- -- (3,983)
Changes in current assets and liabilities, net of effects from
various acquisitions and disposition of TKC:
Accounts receivable.......................................... (31) (9,146) 4,440
Inventory.................................................... (42) 522 (1,666)
Prepaid expenses and other................................... (210) 36 (3,340)
Accounts payable, accrued liabilities and other.............. (7,797) 14,563 (4,908)
Federal and foreign income taxes payable..................... 821 (1,568) 926
Pension liabilities.......................................... (359) 189 974
-------- -------- --------
Net cash provided by operating activities......................... 16,389 2,488 3,363
-------- -------- --------
Cash flows used for investing activities:
Capital expenditures................................................. (7,549) (14,640) (5,296)
Business acquisitions, net of cash acquired.......................... (4,000) (1,103) --
Purchase of licenses and covenant not to compete..................... -- -- (2,744)
Prepaid lease costs.................................................. -- 1,200 (1,200)
Reduction of other liabilities, related to Vetco acquisition......... -- (1,213) (2,784)
Debt issuance costs.................................................. (1,387) -- --
Other................................................................ (819) (204) (870)
-------- -------- --------
Net cash used for investing activities............................ (13,755) (15,960) (12,894)
-------- -------- --------
Cash flows provided by (used for) financing activities:
Borrowings under financing agreements................................ 76,022 100,431 19,440
Principal payments under financing agreements........................ (72,082) (86,527) (39,203)
S-3 filing costs..................................................... -- (2,464) --
Dividends paid on Redeemable Series A Convertible Preferred Stock.... (700) (700) (649)
Issuance of common stock under employee stock plan................... 63 -- --
Proceeds from sale of common stock, net of registration costs........ -- 29 3,145
Purchase of forward hedge contract................................... -- -- (338)
-------- -------- --------
Net cash provided by (used for) financing activities.............. 3,303 10,769 (17,605)
-------- -------- --------
Effect of exchange rate changes on cash................................ 102 (118) (460)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents................... 6,039 (2,821) (27,596)
Cash and cash equivalents:
Beginning of period.................................................. 2,492 5,313 32,909
-------- -------- --------
End of period........................................................ $ 8,531 $ 2,492 $ 5,313
======== ======== ========
</TABLE>
See accompanying notes.
27
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1993, and 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the accounts of
Tuboscope Vetco International Corporation (the Company) and its wholly owned
subsidiaries, Tuboscope Vetco International Inc. (TVI), Tuboscope Vetco
Capital Corporation (TVCC), and CTI Inspection Services, Inc. (CTI). All
significant intercompany accounts and transactions have been eliminated.
Revenue recognition
The Company recognizes revenue when goods are shipped or when services are
rendered.
Research and engineering costs
Research and engineering costs include support services for redesigning or
improving existing products, as well as upgrading current capabilities to meet
customer needs or requirements, and research and development costs.
Research and development costs are accumulated through engineering research
and development projects. Research and development expenses, included in
research and engineering costs, amounted to approximately $1,147,000,
$1,262,000, and $941,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
Environmental costs
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. Environmental costs which extend the
life, increase the capacity or improve the safety or efficiency of property
owned by the Company are capitalized. Costs which prevent environmental
contamination that has yet to occur are also capitalized. Liabilities are
recorded when environmental assessments and/or remedial efforts are probable,
and the cost can be reasonably estimated.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Accounts receivable
Accounts receivable are net of allowances for doubtful accounts of
approximately $1,599,000 and $1,858,000 in 1994 and 1993, respectively.
Inventory
The Company maintains inventory consisting of equipment components,
subassemblies and expendable parts required to manufacture and support its
tubular inspection equipment and coating facilities. Equipment under
28
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
production for specific sale and lease contracts is also included in equipment
components and parts. Expendable parts are charged to maintenance or supply
expense as used. Components and parts maintained at outlying coating and
inspection facilities are not generally inventoried and parts issued to these
locations are charged to maintenance expense upon issuance when not inventoried.
Rehabilitated equipment and parts are restored to inventory at their net
rehabilitation cost.
Inventory is stated at the lower of cost, as determined by the weighted moving
average method, or market. At December 31, inventory consists of the following
(in thousands):
<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Components, subassemblies and expendable parts... $11,468 $10,185
Equipment under production....................... 3,044 2,344
Inventory reserve................................ (2,081) (1,956)
------- -------
Inventory, net................................. $12,431 $10,573
======= =======
</TABLE>
Property and equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives for financial reporting
purposes and generally by the accelerated or modified accelerated costs recovery
systems for income tax reporting purposes. Estimated useful lives are 33 years
for buildings and 5-12 years for machinery and equipment. The cost of repairs
and maintenance is charged to income as incurred. Major repairs and
improvements are capitalized and depreciated over the remaining useful life of
the asset. The depreciation of fixed assets recorded under capital lease
agreements is included in depreciation expense. Property and equipment
depreciation expense was $10,159,000, $9,665,000, and $8,753,000 for December
31, 1994, 1993, and 1992 respectively.
Identified intangibles
Identified intangibles are being amortized on a straight-line basis, between 5
and 40 years, and are presented net of accumulated amortization of approximately
$10,438,000 and $8,623,000 at December 31, 1994 and 1993, respectively.
Identified intangibles consist primarily of technology, patents, trademarks,
license agreements, existing service contracts and covenants not to compete.
Goodwill
Goodwill represents the excess of the purchase price over the fair market
value of the net assets acquired and is principally related to the acquisition
of "Vetco Services". Such excess costs are being amortized on a straight-line
basis over 40 years. Accumulated amortization at December 31, 1994 and 1993 was
approximately $3,835,000 and $2,634,000, respectively. The carrying value of
goodwill will be reviewed if the facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill
would be reduced by the estimated shortfall of cash flows.
Accounting for income taxes
Effective January 1, 1993 the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109) which
requires deferred income taxes to be recognized for the tax effects of temporary
differences between the financial reported carrying amounts of assets and
liabilities and the
29
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
income tax amounts. As permitted under SFAS No. 109, the Company has elected
not to restate the financial statements. The cumulative effect on January 1,
1993 of adopting SFAS No. 109 was immaterial. For the years prior to January 1,
1993, the provision for income taxes is based on Standard of Financial
Accounting Standards No. 96.
Financial Instruments
Prior to 1994, TVI entered into reverse interest rate swap agreements in the
management of interest rate exposure. The differential to be paid or received
is normally accrued as interest rates change and is recognized over the life of
the agreements or hedged liability, whichever is shorter. No reverse interest
rate swap agreements were entered into 1994, and none were outstanding at
December 31, 1994. In addition, from time to time, in order to hedge foreign
currency exposure on firm commitments, TVI enters into forward foreign currency
contracts. Gains and losses resulting from these instruments are recognized in
the same period as the underlying hedged transaction.
Foreign exchange rates
Revenue and expenses for foreign operations have been translated into U.S.
dollars using average exchange rates and reflect currency exchange gains and
losses resulting from transactions conducted in other than local currencies.
Substantially all foreign assets and liabilities have been translated at
the end of each year at year-end exchange rates with the difference reflected in
stockholders' equity as a cumulative translation adjustment.
Deferred charges
Costs incurred in conjunction with the issuance and registration of long-
term debt are included in other assets and are being amortized on a straight-
line basis over the term of the related debt. Amortization of these costs
amounted to approximately $711,000, $838,000, and $871,000 for the years ended
December 31, 1994, 1993 and 1992, respectively.
Earnings per common share
The computation of earnings per common share is based on net income reduced
by preferred stock dividend requirements, divided by the weighted average number
of outstanding common shares and common stock equivalents. Common stock
equivalents include stock options considered outstanding under the treasury
stock method for years ending 1994 and 1992. Common stock equivalents were not
included in the year ending 1993 as they would be considered anti-dilutive.
Reclassification of Prior Year Amounts
Certain reclassifications of 1993 and 1992 amounts have been made to conform
to the 1994 financial statement presentation.
2. ACQUISITIONS
On October 7, 1994, TVI acquired all the manufacturing and inspection
equipment and inventory of NDT Systems, Inc. and certain related companies,
(NDT), for $4,000,000 in cash. NDT manufactures and sells equipment used in the
inspection of oil country tubular goods and provides oilfield inspection
services in the United Kingdom.
30
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
On February 4, 1993, the Company acquired certain assets and liabilities of DJ
Inspection Services Inc. (DJ) for approximately $612,000 in cash and the
assumption of approximately $1,836,000 of lease obligations. The assets
purchased included inspection equipment used in the inspection of oil country
tubular goods and covenant not to compete agreements from both DJ and its
majority owner.
The Company acquired the assets and certain liabilities of CTI Inspection
Services Inc. on April 1, 1993. The purchase price consisted of $200,000 cash
and common stock valued at approximately $1,716,000. The acquisition has been
accounted for as a purchase and accordingly the excess purchase price over the
estimated fair market value of the net assets acquired, approximately
$1,803,000, is being amortized over 40 years. CTI is engaged in the business of
above ground storage tank and vessel inspection.
3. RESTRUCTURING COSTS
A restructuring charge of $13,256,000 was incurred in the third quarter of
1993. The restructuring charge was the result of a restructuring plan
implemented in response to international and domestic market conditions.
International drilling declined throughout 1993 as evidenced by the decline in
the international rig count, which averaged 770 rigs for the first nine months
of 1993 down from 870 rigs in the same period of 1992. In addition, heavy
discounting in the domestic market resulted in lower operating margins. In
response to these factors, management implemented a major restructuring plan in
the third quarter of 1993.
The 1993 restructuring charge was related mainly to severance costs associated
with international and domestic overhead personnel, and costs to close certain
facilities. During 1994, approximately $4,400,000 was charged against the
restructuring accrual for international and domestic cash severance payments and
costs associated with closing certain facilities.
At December 31, 1994, the Company had approximately $4,760,000 remaining in
accrued liabilities and $500,000 in fixed asset reserves related to the
restructuring. The remaining accrual at December 31, 1994 was related mainly to
the continuation of foreign severance payments expected to be made in 1995 and
the consolidation of two foreign coating plants, which is scheduled for the
second half of 1995.
4. ACCRUED LIABILITIES
At December 31, accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Accrued compensation................. $ 5,089 $ 4,276
Accrued restructuring costs.......... 4,760 5,668
Accrued interest..................... 2,471 1,465
Accrued insurance.................... 1,264 1,388
Real estate, sales and other taxes... 1,183 1,728
Accrued commissions.................. 1,150 1,249
Other................................ 3,849 4,150
------- -------
$19,766 $19,924
======= =======
5. INCOME TAXES
</TABLE>
Effective January 1, 1993 the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which
recognizes deferred tax assets and liabilities for differences
31
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
between the financial reporting and tax reporting bases of assets and
liabilities as well as operating loss and tax credits carryforwards for tax
purposes. The cumulative impact of the adoption of SFAS 109 on the January 1,
1993 beginning balance for deferred income taxes was immaterial.
The components of income before income taxes and extraordinary item consist of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1993 1992
-------- --------- --------
<S> <C> <C> <C>
Domestic... $ 1,874 $(14,713) $(2,345)
Foreign.... 12,415 3,906 6,894
------- -------- -------
$14,289 $(10,807) $ 4,549
======= ======== =======
</TABLE>
Such income is inclusive of various intercorporate eliminations of income or
expense items, such as royalties, interest and similar items that are taxable or
deductible in the respective locations. Such income is also inclusive of export
sales by domestic locations. Therefore, the relationship of domestic and
foreign taxes to reported domestic and foreign income is not representative of
actual effective tax rates.
The provision for income taxes (benefit) before extraordinary item consists of
the following at December 31 (in thousands):
<TABLE>
<CAPTION>
DEFERRED
LIABILITY METHOD METHOD
---------------------------- ------------
1994 1993 1992
------------- ------------ ------------
<S> <C> <C> <C>
Current provision (benefit):
Federal................................. $ 907 $ (715) $ 1,098
State................................... 204 100 351
Foreign................................. 3,989 4,386 4,494
------ ------- -------
Total current provision.............. 5,100 3,771 5,943
------ ------- -------
Deferred provision (benefit):
Federal................................. (731) (3,216) (3,633)
State................................... (400) (170) (489)
Foreign................................. 2,032 (2,830) (794)
------ ------- -------
Total deferred provision (benefit)... 901 (6,216) (4,916)
------ ------- -------
Total provision (benefit)............ $6,001 $(2,445) $ 1,027
====== ======= =======
</TABLE>
Additionally, in 1994 the Company recorded a current tax benefit of $411,000
relating to the extraordinary item of $1,175,000 and in 1993 the Company
recorded a deferred tax benefit of $2,421,000 relating to the extraordinary item
of $6,918,000.
The components of the provision (benefit) for deferred income taxes consist of
the following in (thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1992
-------------
<S> <C>
Taxable gains not reflected in financial net
income............................................ $(5,657)
Financial liabilities not given effect for tax
purposes.......................................... 1,682
Intercorporate profit not reflected in financial
net income........................................ (1,119)
Net operating loss carryforwards................... 997
Minimum tax credit carryforwards................... (852)
Depreciation....................................... 800
State income taxes................................. (489)
Other, net......................................... (278)
-------
$(4,916)
=======
</TABLE>
32
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
During 1993, the Revenue Reconciliation Act of 1993 became law. Under the
Act, the maximum federal income tax rate was retroactively increased from 34% to
35% which resulted in an additional $394,000 provision for deferred tax
liabilities.
The reconciliation of the expected to the computed tax provision (benefit) is as
follows at December 31 (in thousands):
<TABLE>
<CAPTION>
DEFERRED
LIABILITY METHOD METHOD
------------------------------ -------------
1994 1993 1992
-------------- ------------- ------------
<S> <C> <C> <C>
Tax expense (benefit) at federal statutory rate.................................. $ 5,001 $(3,783) $ 1,547
Foreign tax credits utilized, net................................................ (1,807) (1,936) (3,761)
Foreign withholding taxes, net of federal benefit................................ 1,243 1,761 1,281
Valuation allowance against net operating loss................................... 448 862 --
Nondeductible goodwill amortization.............................................. 331 595 386
Foreign earnings subject to tax at rates differing from federal statutory rate... (217) (475) (133)
Increase in federal income tax rate.............................................. -- 394 --
Utilization of foreign net operating loss carryover.............................. (149) (346) (362)
Federal income tax provision on distributed foreign earnings..................... 1,142 332 2,095
State income taxes, net of federal benefit....................................... (127) (46) (91)
Nondeductible capital loss carryover............................................. -- -- 229
Research and experimentation tax credits......................................... -- -- (76)
Other, net....................................................................... 136 197 (88)
------- ------- -------
$ 6,001 $(2,445) $ 1,027
======= ======= =======
</TABLE>
33
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1994 are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------- -------------
<S> <C> <C>
Gross deferred tax assets:
Foreign tax credit carryforward............................. $ 4,673 $ 4,919
Domestic and foreign operating losses....................... 3,138 4,479
Accrued liabilities & other reserves........................ 1,756 2,744
Investment tax credit carryforward.......................... 1,934 1,934
Reclamation accruals........................................ 169 1,770
Retirement & benefit accruals............................... 682 1,578
Inventory reserves.......................................... 2,286 1,199
Elimination of intercompany markup.......................... 2,054 719
Minimum tax credit carryforward............................. 276 553
Other deferred tax assets................................... 528 326
--------- --------
Subtotal gross deferred tax assets....................... 17,496 20,221
Valuation allowance......................................... (1,310) (862)
--------- --------
Net deferred tax assets....................................... 16,186 19,359
--------- --------
Gross deferred tax liabilities:
Property and equipment...................................... (19,684) (23,185)
Intangible assets........................................... (3,277) (3,732)
Reserve for legal entity restructure and foreign earnings... (2,874) (2,281)
Pension liability........................................... (748) --
All other................................................... (436) (93)
--------- --------
Gross deferred tax liabilities................................ (27,019) (29,291)
--------- --------
Total net deferred tax liability.............................. ($10,833) ($9,932)
========= ========
</TABLE>
The total net deferred tax liability is comprised of $2,701,000 of net current
tax assets and $13,534,000 net noncurrent deferred tax liabilities.
The Company has undistributed earnings of foreign subsidiaries, as calculated
under the laws of the jurisdiction in which the foreign subsidiary is located,
of approximately $14,700,000 at December 31, 1994. If such earnings were
repatriated, foreign withholding taxes of approximately $930,000 would result.
The Company has already recognized and provided federal income taxes related to
the majority of these earnings of its foreign subsidiaries. It is not practical
to determine the amount of federal income taxes, if any, that might become due
in the event that the balance of such earnings were to be distributed.
At December 31, 1994 the Company has $2,400,000 of domestic net operating
losses which will be carried forward and will expire between 2007 and 2009. The
utilization of the domestic net operating losses is restricted to the taxable
income of certain subsidiaries. The Company also has approximately $6,566,000
of foreign net operating loss carryforwards of which $3,801,000 can be carried
forward indefinitely and the remaining $2,765,000 will expire between 1997 and
1999.
The Company has recorded a valuation allowance of $1,310,000 against these net
operating losses as the Company believes that the corresponding deferred tax
asset may not be realizable. The Company's valuation allowance increased from
$862,000 at December 31, 1993 to $1,310,000 at December 31, 1994. This increase
is principally related to net operating losses that may not be realizable.
34
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
The Company has investment tax credit carryforwards of approximately
$4,800,000 for federal income tax purposes which will expire between 1995 and
2000 if not previously utilized. Approximately $2,900,000 represents financial
statement investment tax credit carryforwards, which if realized, will be
applied to reduce noncurrent intangible assets. In addition, the Company has
foreign tax credit carryforwards of $4,673,000 which will expire between 1997
and 1999. The Company also has minimum tax credit carryforwards of $276,000,
all of which can be carried forward indefinitely.
The Company is currently engaged in tax audits and appeals in various tax
jurisdictions. The years covered by each audit or appeal vary considerably
among legal entities. Assessments, if any, are not expected to have a material
adverse effect on the financial statements.
The Company has considered prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. The Company has assumed
approximately $7 million of benefit attributable to such tax planning
strategies. In the event the Company were to determine in the future that any
such tax planning strategies would not be implemented, an adjustment to the
deferred tax liability would be charged to income in the period such
determination was made.
35
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
6. LONG-TERM DEBT
At December 31, long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
-------- ---------
<S> <C> <C>
(IN THOUSANDS)
$35,000,000 Revolving Facility expiring June 30, 1997. Interest of
7.3125% and 8% at December 31, 1994 payable as described below....................... $ 20,000 $ --
$13,000,000 Term Notes payable to lenders, interest of 8% at December 31, 1994.
Principal and interest payable as described below through June 30, 1999.............. 12,000 --
$10,000,000 Term Notes payable to lender, interest of 8.3125% at December 31,
1994. Principal and interest payable as described below through June 30, 2001....... 10,000 --
$29,000,000 revolving note until February 15, 1994 and $25,000,000 thereafter.
Average interest rate of 5.5% at December 31, 1993.................................... -- 20,000
$46,000,000 term notes payable to participating lenders, interest of 5.375% at
December 31, 1993..................................................................... -- 18,750
$4,000,000 bank credit agreement note. Interest of 5.375% at
December 31, 1993..................................................................... -- 4,000
$1,000,000 Swing Note Agreement. Interest of 6.5 % at December 31, 1993............... -- 310
$7,500,000 Promissory Notes payable, interest of 11.50% at December 31, 1994.
Principal and interest payable as defined through February 1, 1999.................... 6,428 --
$75,000,000 senior subordinated notes, interest at 10.75% payable semi-
annually, principal due on April 15, 2003............................................ 75,000 75,000
Notes payable related to the acquisition of "SOS," interest at 10%, principal due in
installments as described below through July 23, 1995................................. 2,500 3,000
Industrial Development Revenue Bonds, unsecured, interest at rates 9.5% and 10%,
maturities through October 1, 2005.................................................... 2,000 2,000
$1,700,000 Promissory Note, interest at prime rate + 1% (7% at December 31,
1994), principal and interest due in monthly installments through December 28,
1997................................................................................. 1,160 1,441
$1,135,760 Financing Agreement, principal and interest due in monthly installments
through August 8, 1999. Interest of 11.5% at December 31, 1994....................... 1,036 1,412
Other.................................................................................. 232 503
-------- --------
Total debt............................................................................. 130,356 126,416
Less current maturities................................................................ 6,505 (24,927)
-------- --------
Long-term debt due after one year.................................................. $123,851 $101,489
======== ========
</TABLE>
Principal payments of long-term debt for years subsequent to 1995 are as follows
(in thousands):
<TABLE>
<S> <C>
1996......... $ 4,415
1997......... 24,948
1998......... 4,552
1999......... 5,436
Thereafter... 84,500
--------
$123,851
========
</TABLE>
36
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
On June 30, 1994, the Company's subsidiaries, TVI, CTI, and TVCC,
entered into a new credit agreement with a group of participating lenders. The
agreement included $23,000,000 in term loan facilities, a $35,000,000 revolving
credit facility, and a $1,000,000 letter of credit facility. These obligations
are guaranteed by the Company and secured by substantially all of the assets of
TVI, CTI, TVCC, Tuboscope Pipeline Services Inc. and Tube-Kote Inc., and the
stock of certain subsidiaries. Proceeds from the new loans were used
principally to retire the debt balances outstanding under the previous senior
credit agreement. An after-tax extraordinary loss of $764,000 was incurred in
the second quarter of 1994 as a result of the early retirement of debt under the
previous senior credit agreement and related write-off of unamortized debt fees.
The available amount under the revolving credit facility is determined using
the borrowing base, as defined, but not to exceed the maximum commitment of
$35,000,000. Commitment fees on the unused portion of the revolver range from
.325% to .5% based on certain financial ratios. The fee on letters of credit
issued under the agreement is 1% per annum on the principal amount. At December
31, 1994, TVI had outstanding letters of credit amounting to approximately
$2,910,000 and an available facility of approximately $12,090,000 remaining on
the $35,000,000 revolving line of credit. The Company also had approximately
$186,000 of outstanding letters of credit against the $1,000,000 letter of
credit note and approximately $814,000 of remaining credit available. The
revolving credit agreement expires June 30, 1997.
The term loan facility requires increasing quarterly installments with the
initial payment of $500,000 beginning September 30, 1994 and the final payment
due June 30, 2001. Mandatory prepayment is required when the Company generates
excess cash flow as defined, or upon the transfer of certain assets. No
mandatory prepayment was required in 1994.
The credit agreement provides for the borrowers to elect interest at a base
rate or a Eurodollar rate, as defined. Interest on the base rate loans accrue
at base rate to base rate plus 1.5%, based on a ratio of total funded debt to
earnings before interest, taxes, extraordinary gains and losses, and
depreciation and amortization. Interest on Eurodollar rate loans accrue at
LIBOR plus 1.0% to LIBOR plus 2.5%, based on a ratio of total funded debt to
earnings before interest, taxes, extraordinary gains and losses, and
depreciation and amortization. Interest is payable on all notes at calendar
quarter end for base rate borrowings and on the earlier of the last business day
of the interest period or three months from inception for LIBOR rate borrowings.
The credit agreement requires an interest rate cap agreement be maintained
beginning no later than six months from the initial borrowing date for at least
$15,000,000 of the term loans and to maintain such protection for a period of
not less than three years. At December 31, 1994 the Company had purchased a
$20,000,000, two year cap, and received a six month extension (through June 30,
1995) from the lenders regarding the purchase of additional protection.
In January 1994, the Company obtained a $7.5 million loan secured by its new
inspection and coating facility in Aberdeen, Scotland. The funds were used to
reduce the Company's revolving credit facility by $4.0 million and the senior
term debt by $3.5 million. Accordingly, a portion of the current maturities of
the term loan and revolving credit facilities was classified as noncurrent
liabilities at December 31, 1993. Interest is calculated at base rate plus 3%.
Interest and principal are payable monthly through February 1, 1999.
In April 1993, TVI issued $75,000,000 of 10.75% senior subordinate notes
(Notes) due April 15, 2003. The proceeds of the Notes were used to redeem the
$65,697,000 senior subordinate debentures. TVI has the option to redeem the
Notes beginning in 1998 at 105 3/8% of principal ranging down to 100% of
principal plus accrued interest in 2001. The Notes are subordinated to the
payment in full of all senior indebtedness, as defined. Under the provisions of
the indenture, TVI is prohibited from paying any dividends to the holders of
common stock and acquiring or retiring for value any common stock of TVI under
certain circumstances. At December 31, 1994, no retained earnings are available
for payment of dividends on common stock and no other restricted payments have
been made. In the event that certain assets are sold and proceeds in excess of
$10,000,000 are not reinvested into related businesses within 270 days, TVI is
required to offer to repurchase the Notes at 100% of principal plus
37
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
accrued interest on a pro rata basis. Upon a change in control and a rating
decline (triggering event), TVI may be required to repurchase the Notes at 101%
of principal plus accrued interest. The Company's 10.75% debentures are not
traded actively on bond markets. Based on information obtained from a national
brokerage company, the fair market value of the debentures was approximately par
value based on trades consummated during February 1995. Management believes the
carrying amount of the Company's other debt approximates fair market value.
On May 1, 1993, TVI repurchased its $65,697,000 senior subordinated debentures
at a premium. The loss has been reflected as an extraordinary item in the
consolidated statement of operations. The pre-tax extraordinary item consists
of a $4,599,000 premium paid at the repurchase and $2,319,000 write-off of the
original issue discount and unamortized debt issue costs.
The credit agreement, indenture and notes contain various covenants that limit
TVI's ability to, among other things, pay dividends, purchase capital stock,
incur additional indebtedness, dispose of assets and transact with affiliates.
TVI is also required to maintain certain minimum financial ratios, as set forth
in the agreements. In addition to the covenants and financial ratios mentioned
above, the credit agreement contains certain events of default. Management
believes it is in compliance with all covenants in the credit agreement and
indenture.
In connection with the SOS acquisition, TVI issued $4 million of notes payable
to the sellers. The notes are payable in annual installments of $500,000 with
the remaining principal due July 23, 1995. The SOS notes are senior in right of
payment to the senior subordinated debentures, and may be paid in advance
without penalty. The notes are secured by the "SOS" land and buildings.
In 1992, the Company purchased three reverse interest rate swap agreements in
order to convert their fixed rate subordinated debentures to variable rate debt.
The swap agreements were accounted for as hedges. At December 31, 1992, TVI had
two outstanding swap agreements with financial institutions, having a total
notational principal amount of $70 million. Under one of the agreements, TVI
received a fixed rate of 5.5% on $50 million and paid a floating rate based on
LIBOR, as determined in six month intervals. In the second agreement, TVI
received a fixed rate of 4.77% on $20 million and paid a floating rate based on
LIBOR, also determined in six month intervals. During 1992 the Company
terminated one of its swap agreements at a gain of approximately $756,000. The
gain was being amortized over the original life of the swap.
In 1993, as a result of favorable changes in interest rates, the Company
terminated the remaining two swap agreements at a gain of approximately
$566,000. The swap agreements reduced 1993 interest expense by approximately
$1,246,000.
7. REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK
The holders of the Series A Convertible Preferred Stock are entitled to
receive cash dividends, at the annual rate of $7.00 per share, which are payable
quarterly beginning December 31, 1991. The dividends are cumulative with
additional dividends thereon, compounded quarterly and at the same rate, for
each period such dividends remain unpaid. Accrued dividends payable of $175,000
were included in the Preferred Stock balance at December 31, 1994.
The holders of the Preferred Stock may convert each share into ten shares of
Common Stock of the Company. The Preferred Stock is redeemable at the option of
the Company, at redemption prices ranging from $103.50 per share plus accrued
and unpaid dividends during the 12 months beginning October 31, 1994 to $100 per
share plus accrued and unpaid dividends at October 31, 1996.
The Company must redeem all of the outstanding Preferred Stock on December 1,
1996 at $100 per share plus accrued and unpaid dividends. The Preferred Stock
may be exchanged, at the option of the Company, for shares
38
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
of common stock with the number of shares to be exchanged for each share of
Preferred Stock equal to $100 plus any accrued and unpaid dividends divided by
the then current market price of the Common Stock.
The holders of the Preferred Stock are entitled to certain voting rights
whenever dividends amounting to six quarterly dividend payments are in arrears.
8. COMMON STOCKHOLDERS' EQUITY
A stockholder approved stock option plan reserves and authorizes the grant of
options to purchase up to 1,399,000 shares of common stock to officers and key
employees of the Company and 200,000 shares for non-employee members of the
Board of Directors. Options granted are generally exercisable in installments
starting one year from the date of grant and generally expire ten years from the
date of grant.
The following summarizes options activity:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
------------ ------------ -----------
<S> <C> <C> <C>
Shares under option at beginning of year..... 1,122,324 827,974 693,348
Granted...................................... 235,000 342,000 166,500
Cancelled.................................... (30,597) (41,748) (27,972)
Exercised.................................... (1,074) (5,902) (3,902)
----------- ----------- ----------
Shares under option at end of year........... 1,325,653 1,122,324 827,974
----------- ----------- ==========
Average price of outstanding options......... $ 6.46 $ 6.47 $ 6.53
=========== =========== ==========
Price range of options exercised............. $.32-$6.875 $.32-$6.875 $.32-$6.75
=========== =========== ==========
Exercisable at end of year................... 600,437 408,075 153,047
=========== =========== ==========
Options available for grant at end of year... 245,237 449,640 749,890
=========== =========== ==========
</TABLE>
At the 1993 Annual Meeting of Stockholders, the stockholders approved a
qualified stock purchase plan within the meaning of Section 423(b) of the
Internal Revenue Code of 1986. As part of such plan, a maximum of 100,000
shares of the Company's common stock was authorized to be sold. The plan was
activated in the second quarter of 1994, and 14,135 shares were issued in 1994
at an average price of $4.36 per share.
9. RETIREMENT AND OTHER BENEFIT PLANS
On May 13, 1988, TVI adopted a defined contribution retirement plan, which
covers substantially all domestic employees. Employees may voluntarily
contribute up to 20% of compensation, as defined, to the plan. The
participants' contributions are matched by the Company up to a maximum of 1 1/2%
of compensation. Beginning on January 1, 1994, the Company's matching
contribution was in common stock of the Company. Prior to 1994, the matching
contribution was in cash. Contributions were approximately $251,000 (40,216
shares at an average transfer price of $6.21), $552,000 (in cash), and $576,000
(in cash) for the periods ended December 31, 1994, 1993, and 1992 respectively.
39
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
In connection with the acquisition of Vetco Services, TVI assumed the
responsibility of two defined benefit pension plans in Germany covering
substantially all full-time employees. Plan benefits are based on years of
service and employee compensation for the last three years of services. The
plans are unfunded and benefit payments are made directly by Vetco Services.
Pension expense includes the following components for the fiscal years ending
December 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Service cost........ $ 277 $ 328
Interest cost....... 500 448
Net amortization.... (315) (315)
----- -----
Pension expense... $ 462 $ 461
===== =====
</TABLE>
The following table sets forth the amounts recognized in the Company's
consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested................................................ $6,041 $ 6,043
Non-Vested............................................ 289 343
------ -------
Accumulated benefit obligation.......................... 6,330 6,386
Additional amounts related to projected pay increases... 822 1,084
------ -------
Total projected benefit obligations..................... 7,152 7,470
Unrecognized net gain................................... 2,254 2,569
------ -------
Pension liability....................................... 9,406 10,039
Less - amount included in current liabilities........... 100 59
------ -------
Noncurrent portion of pension liability................. $9,306 $ 9,980
====== =======
</TABLE>
The decrease in pension liability from 1993 to 1994 was primarily the
result of fewer active employees in the German pension plan in 1994. The
rates of increase in future compensation levels used in determining the
projected benefit obligations were 3% for December 31, 1994 and 1993,
respectively. The discount rate was 7% for December 31, 1994 and 6% for
December 31, 1993. The unrecognized net gain from the change in projected
compensation levels is being amortized over ten years.
Certain other foreign operations maintain small defined benefit and defined
contribution plans.
10. COMMITMENTS AND CONTINGENCIES
TVI is a defendant in various legal proceedings for events that occurred prior
to May 13, 1988, the date of the acquisition of TVI from Minstar. Minstar
agreed to indemnify the Company with respect to actions existing or pending on
or prior to the date of acquisition. The agreement to acquire TVI also contains
certain indemnifications related to environmental matters and product and/or
general liability claims arising out of occurrences on or prior to the date of
acquisition. Claims related to such environmental matters must be filed prior
to May 13, 1992, and Minstar has agreed to indemnify the Company for the first
$1,000,000 of losses and 50% of losses in excess of $2,000,000. The Company is
to be indemnified for product and/or general liability claims arising out of
occurrences prior to May 13, 1988; however, some claims may be eligible for
indemnification only after the aggregate of losses exceeds $1,500,000. The
Company believes that, based upon insurance and indemnification from Minstar,
these potential claims, if asserted, would not have a material adverse affect on
the Company's results of operations or financial condition.
40
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
The Company is subject to legal proceedings for events which arise in the
ordinary course of its business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the results of
operations or financial position of the Company.
TVI leases certain facilities and equipment under operating leases that expire
at various dates through 2049. These leases generally contain renewal options
and require the lessee to pay maintenance, insurance, taxes and other operating
expenses in addition to the minimum annual rentals.
Rental expense related to operating leases approximated $8,464,000,
$7,384,000, and $6,343,000 in 1994,
1993, and 1992, respectively.
Future minimum lease commitments under noncancelable operating leases with
initial or remaining terms of one year or more at December 31, 1994 are payable
as follows (in thousands):
<TABLE>
<S> <C>
1995................................... $ 5,874
1996................................... 3,545
1997................................... 1,985
1998................................... 777
1999................................... 401
Thereafter............................. 2,903
-------
Total future lease commitments......... $15,485
=======
</TABLE>
11. CONSOLIDATED STATEMENT OF CASH FLOWS
The Company had the following noncash financing and investing activities
(in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
----- ------- -------
<S> <C> <C> <C>
Acquisitions:
Fair value of assets acquired.................. $ -- $ 7,951 $ --
Cash paid...................................... -- (1,103) --
Common stock issued............................ -- (1,716) --
----- ------- -------
Liabilities assumed......................... $ -- $ 5,132 $ --
===== ======= =======
Dividends accrued on preferred stock............. $ 175 $ 175 $ 175
===== ======= =======
</TABLE>
Supplemental disclosure of cash flow information (in thousands):
Cash paid during the period for:
<TABLE>
<S> <C> <C> <C>
Interest...................... $11,774 $10,984 $11,750
======= ======= =======
Taxes (net of refunds)........ $ 3,530 $ 5,029 $ 4,834
======= ======= =======
</TABLE>
On January 2, 1992, a subsidiary of TVI completed a transaction pursuant to
which the assets used in the Company's worldwide TKC premium coupling business
were exchanged for the assets used in the Far East inspection business of a
former licensee. The transaction included only an exchange of assets and did
not include any cash payments. The Company accounted for this non-monetary
transaction consistent with APB Opinion No. 29 and valued the assets purchased
based on the fair market value of assets surrendered (TKC assets). A non-
41
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
monetary gain of $3,983,000 was recognized, representing the difference between
the fair market value of the assets purchased of $5,950,000 and the net carrying
value of the TKC assets of $1,967,000.
12. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
The Company operates principally in one industry segment, the inspection and
coating of tubular products used in the oil and gas industry, and industrial
inspection of oilfield and energy related products. Industrial inspection
revenues are closely related to oilfield revenues as the major customers are the
same, the technology utilized is similar and sales and services are performed
from the same area offices as oilfield inspection services.
Information about the Company's operations in various geographic areas is
presented below. The Company's areas of operation outside the United States are
grouped into six geographic areas, representative of the major markets served.
Revenue from unaffiliated customers represents total net revenue from the
respective areas after elimination of inter-geographic transactions. U.S.
exports are shown with the corresponding destination of the product or service.
Operating profit (loss) represents revenue less operating costs and expenses
corresponding to the specific geographic areas. Identifiable assets are those
assets used in the geographic areas listed and reflect eliminations of
intergeographic balances.
<TABLE>
<CAPTION>
UNITED FAR MIDDLE LATIN OTHER
STATES CANADA EUROPE EAST EAST AMERICA INTERNATIONAL CONSOLIDATED
--------- -------- ------- ------- ------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
YEAR ENDED 12/31/94:
Total revenue:
Unaffiliated customers.... $ 92,873 $13,876 $51,415 $15,515 $16,775 $1,345 $ 376 $192,175
U.S. export sales......... (14,532) -- 2,628 1,066 152 6,220 4,466 --
-------- ------- ------- ------- ------- ------ ------ --------
TOTAL....................... $ 78,341 $13,876 $54,043 $16,581 $16,927 $7,565 $4,842 $192,175
======== ======= ======= ======= ======= ====== ====== ========
Operating profit............ $ 1,078 $ 5,608 $ 9,611 $ 2,705 $ 3,459 $3,513 $1,074 $ 27,048
======== ======= ======= ======= ======= ====== ====== ========
Identifiable assets......... $167,203 $12,899 $94,166 $29,367 $11,719 $ 908 $ 765 $317,027
======== ======= ======= ======= ======= ====== ====== ========
YEAR ENDED 12/31/93:
Total revenue:
Unaffiliated customers... $ 87,183 $13,599 $43,952 $15,711 $20,252 $ 504 $2,139 $183,340
U.S. export sales........ (12,366) 7 4,199 1,938 768 3,730 1,724 --
-------- ------- ------- ------- ------- ------ ------ --------
TOTAL....................... $ 74,817 $13,606 $48,151 $17,649 $21,020 $4,234 $3,863 $183,340
======== ======= ======= ======= ======= ====== ====== ========
Operating profit (loss)..... $(11,378) $ 4,174 $ 3,405 $ 278 $ 2,628 $2,043 $1,295 $ 2,445
======== ======= ======= ======= ======= ====== ====== ========
Identifiable assets......... $168,228 $12,139 $87,751 $29,718 $11,893 $ 379 $ -- $310,108
======== ======= ======= ======= ======= ====== ====== ========
YEAR ENDED 12/31/92:
Total revenue:
Unaffiliated customers.... $ 69,496 $11,645 $47,102 $18,040 $16,593 $ 595 $1,525 $164,996
U.S. export sales......... (20,063) 1,176 4,735 4,137 311 5,455 4,249 --
-------- ------- ------- ------- ------- ------ ------ --------
TOTAL....................... $ 49,433 $12,821 $51,837 $22,177 $16,904 $6,050 $5,774 $164,996
======== ======= ======= ======= ======= ====== ====== ========
Operating profit (loss)..... $ (8,363) $ 3,735 $ 4,132 $ 7,005 $ 4,776 $2,554 $1,902 $ 15,741
======== ======= ======= ======= ======= ====== ====== ========
Identifiable assets......... $160,548 $13,305 $85,624 $29,878 $ 9,880 $ 499 $ -- $299,734
======== ======= ======= ======= ======= ====== ====== ========
</TABLE>
42
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for 1994, 1993 and 1992 is as
follows:
<TABLE>
<CAPTION>
EARNINGS
(LOSS)
OPERATING NET PER
PROFIT INCOME COMMON
REVENUE (LOSS) (LOSS) SHARE
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1994
First Quarter.... $ 45,531 $ 4,748 $ 1,110 $ .05
Second Quarter... 45,239 5,767 727 .03
Third Quarter.... 49,453 7,457 2,234 .11
Fourth Quarter... 51,952 9,076 3,453 .18
-------- -------- -------- ------
Total Year.... $192,175 $ 27,048 $ 7,524 $ .37
======== ======== ======== ======
1993
First Quarter.... $ 39,789 $ 3,244 $ 643 $ .03
Second Quarter... 45,212 4,433 (3,977) (.23)
Third Quarter.... 48,777 (10,204) (11,125) (.61)
Fourth Quarter... 49,562 4,972 1,600 .08
-------- -------- -------- ------
Total Year.... $183,340 $ 2,445 $(12,859) ($.74)
======== ======== ======== ======
1992
First Quarter.... $ 40,256 $ 1,932 $ 676 $ .03
Second Quarter... 40,956 4,411 1,136 .05
Third Quarter.... 41,630 5,482 1,059 .05
Fourth Quarter... 42,154 3,916 651 .03
-------- -------- -------- ------
Total Year.... $164,996 $ 15,741 $ 3,522 $ .15
======== ======== ======== ======
</TABLE>
Results for the fourth quarter 1994 were benefitted by a $1,327,000 gain from an
insurance settlement. The second quarter 1994 net income and earnings per
common share includes an extraordinary item of $764,000 after tax, or $.04. The
second quarter 1993 net loss and loss per common share includes an extraordinary
item of $4,497,000 after tax, or $.25.
43
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994, 1993, and 1992
14. SUMMARIZED FINANCIAL INFORMATION OF REGISTRANT (TVI)
The following is summarized balance sheet information for TVI as of December
31, 1994 and December 31, 1993 and summarized consolidated statements of
operations for the twelve months ended December 31, 1994, 1993, and 1992 (in
thousands):
SUMMARIZED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ -------------
ASSETS
------
<S> <C> <C> <C>
Current assets............................................. $ 84,327 $ 77,637
Noncurrent assets.......................................... 215,827 228,926
-------- --------
Total assets............................................. $300,154 $306,563
======== ========
LIABILITIES AND EQUITY
----------------------
Current liabilities........................................ $ 36,100 $ 64,771
Noncurrent liabilities..................................... 140,980 126,046
Stockholders' equity....................................... 123,074 115,746
-------- --------
Total liabilities and equity............................. $300,154 $306,563
======== ========
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------------------
SUMMARIZED CONSOLIDATED STATEMENTS OF INCOME 1994 1993 1992
-------- -------- ---------
Revenue.................................................... $189,231 $181,004 $164,996
======== ======== =========
Operating profit........................................... $ 26,712 $ 3,384 $ 16,983
======== ======== =========
Income (loss) before income taxes and extraordinary item... $ 15,034 $ (9,788) $ 4,627
======== ======== =========
Net income (loss).......................................... $ 8,001 $(12,086) $ 3,600
======== ======== =========
</TABLE>
15. FINANCIAL ADVISOR ENGAGEMENT
In October 1994, the Company engaged Goldman, Sachs and Company to advise it
with respect to strategic alternatives to enhance shareholder value, including
the possible sale of all or part of the Company. The Company has reviewed
several alternatives with Goldman, Sachs, and the Goldman, Sachs engagement is
ongoing.
44
<PAGE>
SCHEDULE I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
--------- ---------
A S S E T S (IN THOUSANDS)
-----------
<S> <C> <C>
Cash................................................................................ $ 9 $ 9
Investment in subsidiaries.......................................................... 124,122 116,218
-------- --------
Total assets.............................................................. $124,131 $116,227
======== ========
L I A B I L I T I E S A N D E Q U I T Y
-----------------------------------------
Amounts due TVI..................................................................... $ 532 $ 796
Redeemable Series A Convertible Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 100,000 shares issued and outstanding................................ 10,175 10,175
Common stockholders' equity:
Common stock, $.01 par value 35,000,000 shares authorized, 18,466,763 shares
issued and outstanding (18,410,053 at December 31, 1993)..................... 184 184
Paid-in capital................................................................. 115,982 115,668
Retained earnings (deficit)..................................................... (1,469) (8,293)
Cumulative translation adjustment............................................... (1,273) (2,303)
-------- --------
Total common stockholders' equity......................................... 113,424 105,256
-------- --------
Total liabilities and equity.............................................. $124,131 $116,227
======== ========
</TABLE>
See notes to condensed financial statements.
45
<PAGE>
SCHEDULE I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1993 1992
-------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Equity in net earnings (loss) of subsidiaries........ $7,563 ($12,821) $3,600
State franchise tax and other........................ (39) (38) (78)
------ -------- ------
Net income (loss).................................... 7,524 (12,859) 3,522
Dividends applicable to redeemable preferred stock... 700 700 700
------ -------- ------
Net income (loss) applicable to common stock......... $6,824 ($13,559) $2,822
====== ======== ======
</TABLE>
See notes to condensed financial statements.
46
<PAGE>
SCHEDULE I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1993 1992
-------- --------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss).............................................................. $ 7,524 $(12,859) $ 3,522
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Equity in net (earnings) loss of subsidiaries............................ (7,563) 12,821 (3,600)
Changes in current assets and liabilities:
Prepaid expenses..................................................... -- -- 24
Amounts due from TVI subsidiary...................................... -- 175 (175)
Amounts due TVI...................................................... 425 734 17
------- -------- -------
Net cash provided by (used for) operating activities........................... 386 871 (212)
------- -------- -------
Cash flows from investing activities:
Investment in subsidiaries..................................................... -- (200) (2,284)
------- -------- -------
Cash flows from financing activities:
Proceeds from sale of common stock............................................. 314 29 3,145
Dividends paid on Redeemable Series A Convertible Preferred Stock.............. (700) (700) (649)
------- -------- -------
Net cash provided by (used for) financing activities........................... (386) (671) 2,496
------- -------- -------
Net change in cash and cash equivalents.............................................. -- -- --
Cash and cash equivalents:
Beginning of the year.......................................................... 9 9 9
------- -------- -------
End of the year................................................................ $ 9 $ 9 $ 9
======= ======== =======
</TABLE>
See notes to condensed financial statements.
47
<PAGE>
SCHEDULE I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993, AND 1992
No cash dividends were paid to Tuboscope Vetco International Corporation.
For information concerning restrictions pertaining to the redeemable preferred
stock and the common stock and commitments and contingencies, see Notes 6, 7, 8
and 10 of notes to consolidated financial statements of Tuboscope Vetco
International Corporation.
48
<PAGE>
SCHEDULE II
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND CHARGE OFFS END OF
OF YEAR EXPENSES AND OTHER YEAR
--------- ----------- ------------ -------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Allowance for doubtful accounts:
1994......................................... $1,858 $ -- $ (259) $1,599
1993......................................... $1,396 $1,084 $ (622) $1,858
1992......................................... $ 582 $ (204) $1,018 $1,396
Allowance for inventory reserves:
1994......................................... $1,956 $ 91 $ 34 $2,081
1993......................................... $1,947 $ 9 $ -- $1,956
1992......................................... $ 832 $1,100 $ 15 $1,947
Valuation allowance for deferred income taxes:
1994......................................... $ 862 $ 665 $ (217) $1,310
1993......................................... $ -- $ 862 $ -- $ 862
</TABLE>
49
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
--------------- ------------------------------------------------------------------- --------
<S> <C> <C>
3(a) Restated Certificate of Incorporation, dated March 12, 1990. (Note 7)
3(b) Amended and Restated Bylaws. (Note 2)
3(c) Certificate of Designation of Series A Convertible Preferred Stock, (Note 3)
dated October 22, 1991.
3(d) Certificate of Amendment to Restated Certificate of Incorporation (Note 10)
dated May 12, 1992.
3(e) Certificate of Amendment to Restated Certificate of Incorporation (Note 11)
dated May 10, 1994.
4(a) Stockholders' Agreement, dated May 13, 1988, between the (Note 1)
Company, Brentwood, Hub, the Management Investors, the Other
Investors, and the Institutional Investors, including the Common
Stock Registration Rights Agreement attached thereto as Exhibit A.
4(b) Purchase Agreement, dated May 13, 1988, between the Company, (Note 1)
Tuboscope Acquisition Corporation and the purchasers named on
the execution pages thereto.
4(c) Indenture (including the form of Note), dated as of April 1, 1993, (Note 4)
among Tuboscope Vetco International Inc., the Company and
Norwest Bank Minnesota, National Association, as Trustee,
regarding the 10 3/4% Senior Subordinated Notes due 2003 of
Tuboscope Vetco International Inc.
4(e) Various documentation relating to $1,000,000 Alaska Industrial
Revenue Bond financing. (Not filed herewith pursuant to Item
601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to
furnish copies of relevant documentation to the Securities and
Exchange Commission upon request).
4(f) Various documentation relating to $1,000,000 Wyoming Industrial
Revenue Bond financing. (Not filed herewith pursuant to Item
601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to
furnish copies of relevant documentation to the Securities and
Exchange Commission upon request).
4(g) Plan of Recapitalization. (Note 2)
4(h) Various promissory notes in the aggregate principal amount of
$4,000,000 relating to the acquisition of Sound Optics Systems,
Inc., dba South Optical Systems, Inc. (Not filed herewith pursuant
to Item 601(b)(4)(iii) of Regulation S-K. The Company hereby
agrees to furnish copies of the relevant documentation to the
Securities and Exchange Commission upon request).
4(i) Purchase Agreement, dated as of September 30, 1991, between the (Note 3)
Company and BHI Hughes Incorporated relating to Vetco Services
Acquisition.
4(j) Secured Credit Agreement, dated June 30, 1994, between (Note 9)
Tuboscope Vetco International Inc., CTI Inspection Services Inc.,
Tuboscope Vetco Capital Corp, Tuboscope Vetco International
Corporation and ABN AMRO Bank, N.V., as Agent.
10(a) Form of Employment Agreement, dated May 13, 1988, between (Note 1)
Tuboscope Inc., the Company and William V. Larkin and
E. Wayne Overman.
10(b) Savings Investment Plan, dated May 13, 1988, as amended by (Note 1)
First Amendment to Savings Investment Plan.
10(c) Second, Third and Fourth Amendments to Savings Investment Plan. (Note 4)
10(d) Fifth, Sixth and Seventh Amendments to Savings Investment Plan. (Note 8)
10(e) Lease Agreement, dated July 1, 1981, between C.M. Thibodaux (Note 1)
Company, Ltd. and AMF Tuboscope, Inc.
10(f) Lease Agreement between Sam J. Siracusa, John Siracusa, Jr., (Note 1)
Elizabeth Ann Siracusa, Louis Anthony Siracusa, Philomena
Siracusa Archer, Catherine Agnes Siracusa, Maria Josette Siracusa,
Julie Ann Siracusa, the Succession of Joseph C. Siracusa and AMF
Tuboscope, Inc., as amended by letter agreement among the same
parties, dated June 14, 1989.
10(g) Agreement to Purchase, Sell and Sublease, dated June 9, 1980, (Note 1)
between Alaska International Construction, Inc. and AMF
Tuboscope, Inc., as amended by letter agreement, dated June 12,
1980 between the same parties.
10(h) Lease Agreement, dated June 10, 1977, between Batinorest and (Note 1)
A.M.F. France.
10(i) Supplementary Agreement Fixed Rental Scheme, dated May 19, (Note 1)
1989, between Jurong Town Corporation and AMF Far East Pte.
Ltd.
10(j) Lease, dated December 13, 1984, between Barclays Nominees (Note 1)
(KWS) Limited and AMF International Limited, as amended by
Transfer of Whole Agreement, dated November 20, 1987, between
AMF International Limited and Tuboscope Limited.
10(k) Description of Life Insurance Plan. (Note 1)
10(l) Amended and Restated Stock Option Plan for Key Employees of (Note 5)
Tuboscope Vetco International Corporation.
10(m) Form of Revised Incentive Stock Option Agreement. (Note 5)
10(n) Form of Revised Non-Qualified Stock Option Agreement. (Note 5)
10(o) Stock Option Plan for Non-Employee Directors of Tuboscope Vetco (Note 6)
International Corporation.
10(p) Amendment to Stock Option Plan for Non-Employee Directors of (Note 6)
Tuboscope Vetco International Corporation.
10(q) Form of Non-Qualified Stock Option Agreement. (Note 6)
10(r) Employee Qualified Stock Purchase Plan. (Note 8)
10(s) Purchase Agreement, dated as of July 20, 1990, by and among Oil (Note 7)
and Gas Manufacturing Company, Inc., F.T. Glascock, Thomas C.
Glascock, J. David Glascock, Hutchison-Hayes International, Inc.,
John F. Joplin, William F. Joplin, Sound Optics Systems, Inc. dba
Sound Optical Systems, Inc. and Tuboscope Inc.
10(t) Form of Employment Agreement, dated July 23, 1990, between (Note 7)
Tuboscope Inc. and Thomas Glascock and William Glascock.
10(u) Purchase Agreement, dated as of September 30, 1991, between the (Note 3)
Company and BHI relating to the Vetco Services Acquisition.
10(v) Amended and Restated Employment Agreement dated June 23, (Note 8)
1993, between the Company, Tuboscope Vetco International Inc.,
and Martin R. Reid.
10(w) Technology Transfer Agreement, dated as of October 29, 1991, (Note 3)
between Tuboscope Inc. and BHI.
10(x) Sublease, dated December 1, 1987, between McDermott (Note 3)
Incorporated and AMF Tuboscope, Inc. as amended by letter
agreement, dated November 10, 1989, between Tuboscope Inc. and
McDermott Incorporated.
10(y) Letter agreement, dated March 5, 1990 amending the Agreement to (Note 3)
Purchase, Sell and Sublease dated June 9, 1980 between AMF
Tuboscope Inc. and Alaska International Construction, Inc. as
amended June 12, 1980.
10(z) Employment Agreement, between Vetco Inspection GmbH and (Note 3)
Gerhard A. Hage.
10(aa) Lease Agreement with respect to Celle, Germany facility. (Note 3)
10(bb) Building Agreement for Land at Jurong, dated May 5, 1983, (Note 3)
between Jurong Town Corporation and Vetco International, Inc.
10(cc) Lease Agreement, dated January 1, 1988, between Mohamed (Note 3)
Alhajri Est. and Vetco Saudi Company.
10(dd) Lease Agreement, dated November 26, 1989, between (Note 3)
Mohammed F. Al-Hajri Est. and Vetco Saudi Arabia Ltd.
10(ee) Lease between J.G.B. Properties Limited and Vetco Inspection (Note 3)
GmbH.
10(ff) Eighth and Ninth Amendment to Savings Investment Plan. (Note 9)
21 Subsidiaries Exhibit 21
23(a) Consent of Ernst & Young Exhibit 23
27 Financial Data Exhibit 27
</TABLE>
<PAGE>
-------------------
Note 1 Previously filed by the Registrant in Registration No. 33-31102 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 2 Previously filed by the Registrant in Registration No. 33-33248 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 3 Previously filed by the Registrant in File No. 33-43525 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 4 Previously filed by the Registrant in Registration No. 33-56182 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 5 Previously filed by the Registrant in Registration No. 33-72150 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 6 Previously filed by the Registrant in Registration No. 33-72072 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 7 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 and incorporated by reference
herein pursuant to Rule 12b-32 of the Exchange Act.
Note 8 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated by reference
herein pursuant to Rule 12b-32 of the Exchange Act.
Note 9 Previously filed in the Quarterly Report on Form 10Q for the
quarter ended June 30, 1994 and incorporated by reference herein
pursuant to Rule 12b-32 of the Exchange Act.
Note 10 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 and incorporated by reference
herein pursuant to Rule 12b-32 of the Exchange Act.
Note 11 Previously filed in the Company's Proxy Statement for the 1994 Annual
Meeting of Stockholders and incorporated by reference herein pursuant
to Rule 12b-32 of the Exchange Act.
51
<PAGE>
EXHIBIT 21
List of all subsidiaries of the Company.
Tuboscope Vetco International Corporation
CTI Inspection Services, Inc.
Tuboscope Vetco Capital Corp.
Tuboscope Vetco Capital Ltd.
Tuboscope Vetco International Inc.
Tuboscope Vetco (Japan) Ltd.
Tuboscope Vetco (France) S.A.
Linalog De Venezuela,Inc.
Tuboscope Vetco Export Sales Corp.
Tuboscope MECL (Trinidad) Ltd.
Tuboscope Pipeline Services Ltd.
Tuboscope Vetco (UK) Ltd.
Linalog Ltd.
Vetco Inspection Norge A.S.
Tuboscope Vetco Canada Inc.
Tuboscope Pipeline Services Canada Inc.
Tuboscope Vetco Far East Pte Ltd.
Phillippines Branch
Australia Branch
Pesaka Inspection Services SDN. BHD.
TVI Inspecciones de Venezuela, C.A.
Tuboscope Vetco De Argentina, S.A.
Vetco Enterprise AG
Vetco Saudi Arabia Ltd.
Tuboscope Vetco Osterreich GmbH
Tuboscope Vetco (Deutschland) GmbH
Tunisia Branch
Bahrain Branch
France Branch
Italy Branch
Netherlands Branch
Oman Branch
Vetco Coating GmbH
Tuboscope Vetco Technology GmbH
Italy Branch
Spain Branch
Indonesia Branch
Tuboscope Vetco (Brunei) SDN. BHD.
Gober Joint Stock Company
Gloria s.r.l.
Tuboscope Vetco (Italia) s.r.l.
Tuboscope Overseas Corp. S.A.
Tuboscope OGI GmbH
<PAGE>
Tuboscope Vetco Services (Panama) Inc.
Singapore Branch
Kuwait Branch
Tuboscope Vetco (Nigeria) Ltd.
Tuboscope Vetco Moscow Ltd.
Tuboscope Vetco (Thailand) Ltd.
Tuboscope Pipeline Services Inc.
Tuboscope Vetco Do Brasil Equipamentos e Servicos Ltda.
Tube-Kote Inc.
Tuboscope Vetco International Environmental Services Inc.
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-72150) pertaining to the Amended and Restated Stock Option Plan for
Key Employees of Tuboscope Vetco International Corporation, the Registration
Statement (Form S-8 No. 33-72072) pertaining to the Stock Option Plan for
Non-Employee Directors of Tuboscope Vetco International Corporation, and the
Registration Statement (Form S-8 No. 33-54337) pertaining to the Tuboscope Vetco
International Corporation Employee Qualified Stock Purchase Plan, and each
related Prospectus, of our report dated February 17, 1995, with respect to the
consolidated financial statements and schedules for Tuboscope Vetco
International Corporation included in the annual report (Form 10-K) for the year
ended December 31, 1994.
ERNST & YOUNG LLP
Houston, Texas
March 30, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 8,531
<SECURITIES> 0
<RECEIVABLES> 52,667
<ALLOWANCES> 1,599
<INVENTORY> 12,431
<CURRENT-ASSETS> 80,994
<PP&E> 192,476
<DEPRECIATION> 42,581
<TOTAL-ASSETS> 317,027
<CURRENT-LIABILITIES> 45,068
<BONDS> 123,851
<COMMON> 184
10,175
0
<OTHER-SE> 113,240
<TOTAL-LIABILITY-AND-EQUITY> 317,027
<SALES> 13,573
<TOTAL-REVENUES> 192,175
<CGS> 7,935
<TOTAL-COSTS> 139,261
<OTHER-EXPENSES> 1,201
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,190
<INCOME-PRETAX> 14,289
<INCOME-TAX> 6,001
<INCOME-CONTINUING> 8,288
<DISCONTINUED> 0
<EXTRAORDINARY> (764)
<CHANGES> 0
<NET-INCOME> 7,524
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
